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United States Government Accountability Office:
GAO:
Report to Congressional Addressees:
December 2012
Dodd-Frank ACT:
Agencies’ Efforts to Analyze and Coordinate Their Rules:
GAO-13-101:
GAO Highlights:
Highlights of GAO-13-101, a report to congressional addressees.
Why GAO Did This Study:
The Dodd-Frank Act requires or authorizes various federal agencies to
issue hundreds of rules to implement reforms intended to strengthen
the financial services industry. GAO is required to annually study
financial services regulations. This report examines (1) the
regulatory analyses federal agencies performed for rules issued
pursuant to the Dodd-Frank Act; (2) how the agencies consulted with
each other in implementing the final rules to avoid duplication or
conflicts; and (3) what is known about the impact of the Dodd-Frank
Act rules. GAO identified 66 final Dodd-Frank Act rules in effect
between July 21, 2011, and July 23, 2012. GAO examined the regulatory
analyses for the 54 regulations that were substantive and thus
required regulatory analyses; conducted case studies on the regulatory
analyses for 4 of the 19 major rules; conducted case studies on
interagency coordination for 3 other rules; and developed indicators
to assess the impact of the act’s systemic risk provisions and
regulations.
What GAO Found:
Federal agencies conducted the regulatory analyses required by various
federal statutes for all 54 regulations issued pursuant to the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
that GAO reviewed. As part of their analyses, the agencies generally
considered, but typically did not quantify or monetize, the benefits
and costs of these rules. Most of the federal financial regulators, as
independent regulatory agencies, are not subject to executive orders
that require comprehensive benefit-cost analysis in accordance with
guidance issued by the Office of Management and Budget (OMB). Although
most financial regulators are not required to follow OMB’s guidance,
they told GAO that they attempt to follow it in principle or spirit. GAO
’s review of selected rules found that regulators did not consistently
follow key elements of the OMB guidance in their regulatory analyses.
For example, while some regulators identified the benefits and costs
of their chosen regulatory approach in proposed rules, they did not
evaluate their chosen approach compared to the benefits and costs of
alternative approaches. GAO previously recommended that regulators
more fully incorporate the OMB guidance into their rulemaking
policies, and the Office of Comptroller of the Currency and the
Securities and Exchange Commission have done so. By not more closely
following OMB’s guidance, other financial regulators continue to miss
an opportunity to improve their analyses.
Federal financial agencies continue to coordinate on rulemakings
informally in order to reduce duplication and overlap in regulations
and for other purposes, but interagency coordination does not
necessarily eliminate the potential for differences in related rules.
Agencies coordinated on 19 of the 54 substantive regulations that GAO
reviewed. For most of the 19 regulations, the Dodd-Frank Act required
the agencies to coordinate, but agencies also voluntarily coordinated
with other U.S. and international regulators on some of their
rulemakings. According to the regulators, most interagency
coordination is informal and conducted at the staff level. GAO’s
review of selected rules shows that differences between related rules
may remain even when coordination occurs. According to regulators,
such differences may result from differences in their jurisdictions or
the markets. Finally, the Financial Stability Oversight Council (FSOC)
has not yet implemented GAO’s previous recommendation to work with
regulators to establish formal interagency coordination policies.
Most Dodd-Frank Act regulations have not been finalized or in place
for sufficient time for their full impacts to materialize. Recognizing
these and other limitations, GAO took a multipronged approach to
assess the impact of some of the act’s provisions and rules, with an
initial focus on the act’s systemic risk goals. First, GAO developed
indicators to monitor changes in certain characteristics of U.S. bank
holding companies subject to enhanced prudential regulation under the
Dodd-Frank Act (U.S. bank SIFIs). Although the indicators do not
identify causal links between their changes and the act-—and many
other factors can affect SIFIs—some indicators suggest that since 2010
U.S. bank SIFIs, on average, have decreased their leverage and
enhanced their liquidity. Second, empirical results of GAO’s
regression analysis suggest that, to date, the act may have had little
effect on U.S. bank SIFIs’ funding costs but may have helped improve
their safety and soundness. GAO plans to update its analyses in future
reports, including adding indicators for other Dodd-Frank Act
provisions and regulations.
What GAO Recommends:
GAO is not making new recommendations in this report but reiterates
its 2011 recommendations that the federal financial regulators more
fully incorporate OMB’s guidance into their rulemaking policies and
that FSOC work with federal financial regulators to establish formal
interagency coordination policies for rulemaking. The agencies
provided written and technical comments on a draft of this report, and
neither agreed nor disagreed with the report’s findings.
View [hyperlink, http://www.gao.gov/products/GAO-13-101]. For more
information, contact A. Nicole Clowers at (202) 512-8678 or
clowersa@gao.gov.
[End of section]
Contents
Letter:
Background:
Regulatory Analyses Provide Limited Information about Benefits and
Costs of Chosen or Alternative Approaches:
Regulators Continue to Coordinate Informally on Rulemakings, but
Differences among Related Rules Still Exist:
Impacts of the Dodd-Frank Act Have Not Yet Fully Materialized and
Remain Uncertain:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Tables Listing Dodd-Frank Act Rules Effective as of July
23, 2012:
Appendix III: Summary of Rulemakings Related to the Dodd-Frank Act
Provisions Applicable to Systemically Important Financial Institutions:
Appendix IV: Econometric Analyses of the Impact of Enhanced Regulation
and Oversight on SIFIs:
Appendix V: Impact Analysis of the Debit Card Interchange Fees and
Routing Rule:
Appendix VI: Econometric Analysis of the Impact the Debit Interchange
Fee Standard on Issuer Banks’ Income:
Appendix VII: Comments from the Securities and Exchange Commission:
Appendix VIII: Comments from the Department of the Treasury:
Appendix IX: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Prudential Regulators and Their Basic Functions:
Table 2: Summary of Four Major Rules Reviewed:
Table 3: Documentation of Coordination in Releases of Dodd-Frank
Regulations, July 21, 2011 through July 23, 2012:
Table 4: Summary of Three Major Rules Reviewed:
Table 5: Summary of Trends in Indicators for U.S. Bank SIFIs, from
Third Quarter 2010 through Second Quarter 2012:
Table 6: Number and Median Size of U.S. Bank Holding Companies and
U.S. Bank SIFIs, at the End of Calendar Year Unless Otherwise Noted
(Assets in Billions of 2012 Q2 Dollars):
Table 7: Foreign Legal Entities of Large U.S. Bank SIFIs, as of
October 22, 2012:
Table 8: Estimated Changes in U.S. Bank SIFIs’ Funding Cost and
Measures of Safety and Soundness Associated with the Dodd-Frank Act,
from Third Quarter 2010 through Second Quarter 2012:
Table 9: Public Companies’ Say-on-Pay Proposals, from 2007 through
June 25, 2012:
Table 10: Dodd-Frank Act Rules Effective between July 21, 2011, and
July 23, 2012:
Table 11: Dodd-Frank Act Rules Effective as of July 21, 2011:
Table 12: Rulemakings Implementing the Dodd-Frank Act Provisions
Applicable to Systemically Important Financial Institutions and Their
Status as of October 12, 2012:
Table 13: Estimated Impacts of the Dodd-Frank Act on Bank SIFIs, from
Third Quarter of 2010 through Second Quarter of 2012 (percentage
points):
Table 14: Estimated Impact of the Debit Interchange Fee Standard on
Covered Banks, from Fourth Quarter of 2011 through Second Quarter of
2012 (percentage points):
Figures:
Figure 1: Total Assets of U.S. Bank SIFIs, as of the Third Quarter of
2010 and Second Quarter of 2012:
Figure 2: Median Market Share for U.S. Bank Holding Companies by Size,
from First Quarter of 2006 through Second Quarter of 2012:
Figure 3: Total Legal Entities of U.S. Bank SIFIs, as of October 23,
2012:
Figure 4: Median Tangible Common Equity as a Percent of Total Assets
for U.S. Bank Holding Companies by Size, from First Quarter of 2006
through Second Quarter of 2012:
Figure 5: Median Tangible Common Equity as a Percent of Risk-Weighted
Assets for U.S. Bank Holding Companies by Size, from First Quarter of
2006 through Second Quarter of 2012:
Figure 6: Median Short-Term Liabilities as a Percent of Total
Liabilities for U.S. Bank Holding Companies by Size, from First
Quarter of 2006 through Second Quarter of 2012:
Figure 7: Median Liquid Assets as a Percent of Short-term Liabilities
for U.S. Bank Holding Companies by Size, from First Quarter of 2006
through Second Quarter of 2012:
Figure 8: Annual and Quarterly U.S. ABS Issuance, from 2000 through
Second Quarter of 2012:
Figure 9: Annual and Quarterly U.S. ABS Issuance Excluding Agency
Mortgage-Related ABS, from 2000 through Second Quarter of 2012:
Abbreviations:
APA: Administrative Procedure Act:
ABS: asset-backed security:
CCAR: Comprehensive Capital and Analysis Review:
CFPB: Consumer Financial Protection Bureau:
CFTC: Commodity Futures Trading Commission:
CRA: Congressional Review Act:
DCI: data collection instrument:
EFTA: Electronic Fund Transfer Act:
EO: Executive Order:
FDIC: Federal Deposit Insurance Corporation:
FSB: Financial Stability Board:
FSOC: Financial Stability Oversight Council:
GDP: gross domestic product:
G-SIB: globally systemically important bank:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OMB: Office of Management and Budget:
OFR: Office of Financial Research:
PIN: personal identification number:
PRA: Paperwork Reduction Act:
RFA: Regulatory Flexibility Act:
SCAP: Supervisory Capital Assessment Program:
SEC: Securities and Exchange Commission:
SIFI: systematically important financial institutions:
SRO: self-regulatory organization:
TARP: Troubled Asset Relief Program:
TSR: total absolute shareholder return:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
December 18, 2012:
Congressional Addressees:
The 2007-2009 financial crisis created major disruptions in
significant parts of the U.S. financial system and threatened the
solvency of some large financial institutions, prompting the federal
government to take extraordinary steps to moderate the adverse
economic impacts. In response to the crisis, Congress passed the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
in 2010, which includes numerous reforms to strengthen oversight of
financial services firms and consolidate certain consumer protection
responsibilities in the Bureau of Consumer Financial Protection,
commonly known as the Consumer Financial Protection Bureau (CFPB).
[Footnote 1] The act requires or authorizes various federal agencies
to issue hundreds of regulations to implement its reforms. As agencies
have turned their attention to implementing these requirements, some
industry associations and others have raised concerns about the
potential impact of the regulations, individually and cumulatively, on
financial markets and financial and nonfinancial institutions.
Agencies can anticipate and evaluate the consequences of their
regulations through regulatory analysis, which provides a formal way
of organizing evidence that can help in understanding potential
effects of new regulations. Benefit-cost analysis, the primary tool
used for regulatory analysis, helps to identify the regulatory
alternatives with the greatest net benefits. We, along with the Office
of Management and Budget (OMB) and others, have identified benefit-
cost analysis as a useful tool that can inform decision making. The
systematic process of determining benefits and costs helps decision
makers organize and evaluate information about, and identify trade-
offs among, alternatives. Because of the merits of benefit-cost
analysis, many agencies are directed by statute or executive order to
conduct such analysis as part of rulemaking. For example, Executive
Order 12,866 (E.O. 12,866) requires executive agencies to assess
anticipated costs and benefits not only of the proposed regulatory
action but also of any alternatives.[Footnote 2] However, this order
does not apply to independent regulatory agencies, including the
banking, futures, and securities regulators (federal financial
regulators).[Footnote 3]
Section 1573(a) of the Department of Defense and Full-Year Continuing
Appropriations Act of 2011 amends the Dodd-Frank Act and directs GAO
to conduct an annual study of financial services regulations,
including those of CFPB.4 In November 2011, we issued our first report
under this mandate.5 Since that report, we have continued to monitor
the development of rules and regulations related to the Dodd-Frank
Act. Specifically, this report examines:
* the regulatory analyses, including benefit-cost analyses, that
federal financial regulators have performed to assess the potential
impact of selected final rules issued pursuant to the Dodd-Frank Act;
* how federal financial regulators consulted with each other in
implementing selected final rules issued pursuant to the Dodd-Frank
Act to avoid duplication or conflicts; and;
* what is known about the impact of the Dodd-Frank Act regulations on
the financial marketplace.
To address the first objective, we reviewed all final rules-—a total
of 66—-that were issued pursuant to the Dodd-Frank Act and became
effective between July 21, 2011, and July 23, 2012, to catalogue the
regulatory analyses (including benefit-cost analyses) the federal
financial regulators conducted.[Footnote 6] Combined with the 32 rules
we identified in our first report, we identified 98 Dodd-Frank Act
rules in effect as of July 23, 2012.[Footnote 7] To assess the
regulatory analyses of the agencies, we reviewed the 66 rules that
were issued and became effective between July 21, 2011, and July 23,
2012. Of these rules, 54 are substantive regulations while 12 are
interpretive rules; general statements of policy; and rules that deal
with agency organization, procedure, or practice. Unlike interpretive
rules, general statements of policy, and rules that deal with agency
organization, procedure, or practice, substantive regulations are
subject to the notice-and-comment rulemaking requirements of the
Administrative Procedure Act (APA) and generally include some form of
regulatory analysis.[Footnote 8] Thus, our review focused on the 54
substantive regulations for our analysis. Of the 54 regulations, 19
rules were determined by the regulators and OMB to be “major” rules
that could have an annual impact on the economy of $100 million or
more. For agencies subject to E.O. 12866, such major rules would be
considered significant regulatory actions and subject to formal
benefit-cost analysis.[Footnote 9] Three federal financial regulators
issued 18 of the 19 major rules: the Board of Governors of the Federal
Reserve System (Federal Reserve), Commodity Futures Trading Commission
(CFTC), and Securities and Exchange Commission (SEC). In addition, the
Department of the Treasury (Treasury), which is subject to E.O.
12,866, issued the other major rule pursuant to the Dodd-Frank Act. We
selected four major rules for in-depth review and compared the
analyses conducted to the principles outlined in OMB Circular A-4,
which provides guidance to federal agencies on the development of
regulatory analysis.[Footnote 10] one major rule that we selected. We
selected the lone SEC major rule during the period that implemented
new statutory authority. CFTC issued several major rules, and we
selected a rule based on our discussions with current and former CFTC
staff. We interviewed agency staffs and reviewed documentation from
the agencies to assess the quality of the benefit-cost or similar
analyses. We also reviewed statutes, regulations, agency guidance, and
other documentation to identify the analyses federal financial
regulators were required to conduct and how the agency intended to
conduct them.
To examine interagency coordination among or between federal financial
regulators in developing rules, we reviewed the 66 Dodd-Frank rules
that were issued and became effective between July 21, 2011, and July
23, 2012, to identify which required interagency coordination and
document whether such coordination occurred. We identified 19 rules
that required interagency coordination. Of the rules requiring
interagency coordination, we selected three for case studies to
examine the extent to which and how agencies coordinated to avoid
conflict and duplication in rulemaking. We selected the rules to
include at least one that two or more regulators jointly issued and at
least one that a single regulator issued. We also selected rules to
include as many of the federal financial regulators as possible,
including the Federal Reserve, CFTC, SEC, the Office of the
Comptroller of the Currency (OCC), and the Federal Deposit Insurance
Corporation (FDIC). We interviewed agency staff and reviewed
documentation from the agencies to assess the extent to which and how
agencies coordinated to avoid conflict and duplication in rulemaking.
Within our scope period, the Federal Reserve and Treasury each issued
To examine the impact of Dodd-Frank Act regulations on the financial
marketplace, we took a multipronged approach. We developed a set of
indicators to monitor changes in certain characteristics of
systemically important financial institutions (SIFI) that might be
affected by Dodd-Frank Act regulations.[Footnote 11] To that end, we
reviewed the legislative history of the Dodd-Frank Act, the act
itself, related regulations, academic studies, GAO and agency reports,
and other relevant documentation. Although changes in the indicators
may be suggestive of the impact of the act on SIFIs, the indicators
have a number of limitations, including that they do not identify any
causal linkages between the act and changes in the indicators.
Moreover, factors other than the act affect SIFIs and, thus, the
indicators. Additionally, we developed a set of indicators related to
the (1) cost of credit provided by bank SIFIs and (2) safety and
soundness of bank SIFIs. We used regression analysis to estimate the
changes in the indicators of bank SIFIs that may be associated with
Dodd-Frank Act provisions and proposed regulations related to the
enhanced prudential regulation of these bank holding companies by the
Federal Reserve. Our analysis does not differentiate the effects of
the act from simultaneous changes in economic conditions or other
factors that may affect such companies. We obtained and addressed high-
level comments and suggestions on all our indicators from Financial
Stability Oversight Council (FSOC) staff and two other market experts.
Finally, we analyzed the initial impacts of several major rules that
were issued pursuant to the Dodd-Frank Act and have been final for
around 1 year or more. As part of that work, we reviewed selected
regulations, analyzed available data about the potential impacts of
the regulations, and interviewed agency officials and market
participants about such impacts. Appendix I contains additional
information on our scope and methodology.
We conducted this performance audit from December 2011 to December
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Financial Services Regulation:
The U.S. financial regulatory structure is a complex system of
multiple federal and state regulators as well as self-regulatory
organizations (SRO) that operate largely along functional lines. That
is, financial products or activities generally are regulated according
to their function, no matter who offers the product or participates in
the activity. The functional regulator approach is intended to provide
consistency in regulation, focus regulatory restrictions on the
relevant functional areas, and avoid the potential need for regulatory
agencies to develop expertise in all aspects of financial regulation.
In the banking industry, the specific regulatory configuration depends
on the type of charter the banking institution chooses. Charter types
for depository institutions include commercial banks, thrifts, and
credit unions. These charters may be obtained at the state or federal
level. The federal prudential banking regulators—all of which
generally may issue regulations and take enforcement actions against
industry participants within their jurisdiction—are identified in
table 1.
Table 1: Prudential Regulators and Their Basic Functions
Agency: Office of the Comptroller of the Currency;
Basic function: Charters and supervises national banks and federal
thrifts.
Agency: Board of Governors of the Federal Reserve System;
Basic function: Supervises state-chartered banks that opt to be
members of the Federal Reserve System, bank holding companies, thrift
holding companies and the nondepository institution subsidiaries of
those institutions, and nonbank financial companies designated by the
Financial Stability Oversight Council.
Agency: Federal Deposit Insurance Corporation;
Basic function: Supervises FDIC-insured state-chartered banks that are
not members of the Federal Reserve System, as well as federally
insured state savings banks and thrifts; insures the deposits of all
banks and thrifts that are approved for federal deposit insurance; and
resolves all failed insured banks and thrifts and has been given the
authority to resolve large bank holding companies and nonbank
financial companies that are subject to supervision by the Board of
Governors of the Federal Reserve System and subject to enhanced
prudential standards.[A]
Agency: National Credit Union Administration;
Basic function: Charters and supervises federally chartered credit
unions and insures savings in federal and most state-chartered credit
unions.
Source: GAO.
[A] 12 U.S.C. § 5384
[End of table]
In addition, the Dodd-Frank Act created CFPB as an independent bureau
within the Federal Reserve System that is responsible for regulating
the offering and provision of consumer financial products and services
under the federal consumer financial laws. Under the Dodd-Frank Act,
at the designated transfer date, certain authority vested in the
prudential regulators transferred to CFPB.[Footnote 12]
The securities and futures industries are regulated under a
combination of self-regulation (subject to oversight by the
appropriate federal regulator) and direct oversight by SEC and CFTC,
respectively. SEC oversees the securities industry SROs, and the
securities industry as a whole, and is responsible for administering
federal securities laws and developing regulations for the industry. SEC
’s overall mission includes protecting investors; maintaining fair,
orderly, and efficient markets; and facilitating capital formation.
CFTC oversees the futures industry and its SROs. Under the Dodd-Frank
Act, CFTC also has extensive responsibilities for the regulation of
swaps and certain entities involved in the swaps markets. CFTC has
responsibility for administering federal legislation and developing
comprehensive regulations to protect the public from fraud and
manipulation, to insure the financial integrity of transactions, and
to reduce systemic risk in the marketplace.
In addition, the Dodd-Frank Act created FSOC.[Footnote 13] FSOC’s
three primary purposes are to identify risks to the financial
stability of the United States, promote market discipline, and respond
to emerging threats to the stability of the U.S. financial system.
FSOC consists of 10 voting members and 5 nonvoting members and is
chaired by the Secretary of the Treasury.[Footnote 14] In consultation
with the other FSOC members, the Secretary is responsible for regular
consultation with the financial regulatory entities and other
appropriate organizations of foreign governments or international
organizations.
Regulations and Federal Rulemaking:
The federal government uses regulation to implement public policy.
Section 553 of APA contains requirements for the most common type of
federal rulemaking—informal rulemaking or “notice and comment”
rulemaking.[Footnote 15] While there are inter-and intra-agency
variations in the informal rulemaking process, federal financial
regulators generally share three basic rulemaking steps or phases:
* Initiation of rulemaking action. During initiation, agencies gather
information that would allow them to determine whether rulemaking is
needed and identify potential regulatory options. To gather
information on the need for rulemaking and potential regulatory
options, agencies may hold meetings with interested parties or issue
an advanced notice of proposed rulemaking. At this time, the agencies
also will identify the resources needed for the rulemaking and may
draft concept documents for agency management that summarize the
issues, present the regulatory options, and identify needed resources.
* Development of proposed rule. During this phase of the rulemaking
process, an agency will draft the notice of proposed rulemaking,
including the preamble (which is the portion of the rule that informs
the public of the supporting reasons and purpose of the rule) and the
rule language. The agency will begin to address analytical and
procedural requirements in this phase. The agency provides “interested
persons” with an opportunity to comment on the proposed rule,
generally for a period of at least 30 days.[Footnote 16]
* Development of final rule. In the third phase, the agency repeats,
as needed, the steps used during development of the proposed rule.
Once the comment period closes for the proposed rule, the agency
either would modify the proposed rule to incorporate comments or
address the comments in the final rule release. This phase also
includes opportunities for internal and external review. As published
in the Federal Register, the final rule includes the date on which it
becomes effective.
APA’s notice and comment procedures exclude certain categories of
rules, including interpretative rules; general statements of policy;
rules that deal with agency organization, procedure, or practice; or
rules for which the agency finds (for good cause) that notice and
public comment procedures are impracticable, unnecessary or contrary
to the public interest.
Dodd-Frank Act Regulations:
Under the Dodd-Frank Act, federal financial regulatory agencies are
directed or have the authority to issue hundreds of regulations to
implement the act’s provisions. In some cases, the act gives the
agencies little or no discretion in deciding how to implement the
provisions. For instance, the Dodd-Frank Act made permanent a
temporary increase in the FDIC deposit insurance coverage amount
($100,000 to $250,000); therefore, FDIC revised its implementing
regulation to conform to the change. However, other rulemaking
provisions in the act appear to be discretionary in nature, stating
that (1) certain agencies may issue rules to implement particular
provisions or that the agencies may issue regulations that they decide
are “necessary and appropriate”; or (2) agencies must issue
regulations to implement particular provisions but have some level of
discretion over the substance of the regulations. As a result, for
these rulemaking provisions, the agencies may decide to promulgate
rules for some or all of the provisions, and may have broad discretion
to decide what these rules will contain and what exemptions, if any,
will apply.
In many instances, exemptions to Dodd-Frank Act provisions are
encompassed in definitions of certain terms that are broadly
established in statute and require clarification through regulation.
Persons or entities that meet the regulatory definitions are subject
to the provision, and those that do not meet the definitions are not.
For example, CFTC and SEC promulgated a regulation that defined the
terms "swap dealer," "security-based swap dealer," "major swap
participant," "major security-based swap participant," and "eligible
contract participant."[Footnote 17] Persons that do not meet the
definitions of these terms may not be subject to the Dodd-Frank Act
provisions concerning swaps and security-based swaps, including
registration, margin, capital, business conduct, and other
requirements. Similarly, FSOC promulgated a regulation and
interpretive guidance regarding the specific criteria and analytic
framework FSOC would apply in determining whether a nonbank financial
company could pose a threat to the financial stability of the United
States.[Footnote 18] Financial firms that are not designated by FSOC,
acting pursuant to the statutory standards, would not be subject to
enhanced prudential supervision by the Federal Reserve.
Regulatory Analyses Provide Limited Information about Benefits and
Costs of Chosen or Alternative Approaches:
Federal agencies conducted the regulatory analyses required by various
federal statutes for all 54 Dodd-Frank Act regulations that we
reviewed. As part of their analyses, the agencies generally
considered, but typically did not quantify or monetize, the benefits
and costs of these regulations. As independent regulatory agencies,
the federal financial regulators are not subject to executive orders
that require comprehensive benefit-cost analysis in accordance with
guidance issued by OMB. While most financial regulators said that they
attempt to follow OMB’s guidance in principle or spirit, we found that
they did not consistently follow key elements of the guidance in their
regulatory analyses. We previously recommended that regulators should
more fully incorporate the OMB guidance into their rulemaking policies.
Regulators Were Not Required to Assess Benefits and Costs of
Regulatory Alternatives:
As part of their rulemakings, federal agencies generally must conduct
regulatory analysis pursuant to the Paperwork Reduction Act (PRA) and
the Regulatory Flexibility Act (RFA), among other statutes.[Footnote
19] PRA and RFA require federal agencies to assess various impacts and
costs of their rules, but do not require the agencies to formally
assess the benefits and costs of alternative regulatory approaches or
the reason for selecting one alternative over another. In addition to
these requirements, authorizing or other statutes require certain
federal financial regulators to consider specific benefits, costs, and
impacts of their rulemakings, as the following describes.
* CFTC, under section 15(a) of the Commodity Exchange Act, is required
to consider the benefits and costs of its action before promulgating a
regulation under the Commodity Exchange Act or issuing certain orders.
Section 15(a) further specifies that the benefits and costs shall be
evaluated in light of the following five broad areas of market and
public concern: (1) protection of market participants and the public;
(2) efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk-management practices; and
(5) other public interest considerations.[Footnote 20]
* Under the Consumer Financial Protection Act (Title X of the Dodd-
Frank Act), CFPB must consider the potential benefits and costs of its
rules for consumers and entities that offer or provide consumer
financial products and services. These include potential reductions in
consumer access to products or services, the impacts on depository
institutions with $10 billion or less in assets, as directed by 12
U.S.C. § 5516, and the impacts on consumers in rural areas.21 In its
initial RFA analysis, CFPB also must describe any projected increase
in the cost of credit for small entities and any significant
alternatives that would minimize such increases for small entities.
[Footnote 22]
* In addition to the protection of investors, SEC must consider
whether a rule will promote efficiency, competition, and capital
formation whenever it is engaged in rulemaking and is required to
consider or determine whether an action is necessary or appropriate in
the public interest.[Footnote 23] SEC also must consider the impact
that any rule promulgated under the Securities Exchange Act would have
on competition.[Footnote 24] This provision states that a rule should
not be adopted if it would impose a burden on competition that is not
necessary or appropriate to the act’s purposes.
* The Electronic Funds Transfer Act (EFTA), as amended by the Dodd-
Frank Act, requires the Federal Reserve to prepare an analysis of the
economic impact of a specific regulation that considers the costs and
benefits to financial institutions, consumers, and other users of
electronic fund transfers.[Footnote 25] The analysis must address the
extent to which additional paperwork would be required, the effect
upon competition in the provision of electronic banking services among
large and small financial institutions, and the availability of such
services to different classes of consumers, particularly low-income
consumers.
However, like PRA and RFA, none of these authorizing statutes
prescribe formal, comprehensive benefit and cost analyses that require
the identification and assessment of alternatives.
In contrast, Executive Order 12,866 (E.O. 12,866), supplemented by
Executive Order 13,563 (E.O. 13,563), requires covered federal
agencies, to the extent permitted by law and where applicable, to (1)
assess benefits and costs of available regulatory alternatives and (2)
include both quantifiable and qualitative measures of benefits and
costs in their analysis, recognizing that some benefits and costs are
difficult to quantify.[Footnote 26] According to OMB, such analysis
can enable an agency to learn if the benefits of a rule are likely to
justify the costs and discover which of the possible alternatives
would yield the greatest net benefit or be the most cost-effective. In
2003, OMB issued Circular A-4 to provide guidance to federal executive
agencies on the development of regulatory analysis as required by E.O.
12,866.[Footnote 27] The guidance defines good regulatory analysis as
including a statement of the need for the proposed regulation, an
assessment of alternatives, and an evaluation of the benefits and
costs of the proposed regulation and the alternatives. It also
standardizes the way benefits and costs of federal regulatory actions
should be measured and reported. Of the federal agencies included in
our review, only FSOC and Treasury are subject to E.O. 12,866. As
independent regulatory agencies, the federal financial regulators—-
CFPB, CFTC, FDIC, the Federal Reserve, OCC, the National Credit Union
Administration (NCUA), and SEC-—are not subject to E.O. 12,866 and
OMB’s Circular A-4.[Footnote 28]
Of the 66 Dodd-Frank Act rules within our scope, 54 regulations were
substantive-—generally subject to public notice and comment under APA—-
and required the agencies to conduct regulatory analysis. These rules
were issued individually or jointly by CFTC, FDIC, the Federal
Reserve, FSOC, NCUA, OCC, SEC, or Treasury.[Footnote 29] (See appendix
II for a list of the regulations within the scope of our review.) In
examining the regulatory analyses conducted for these 54 regulations,
we found the following.
* Agencies conducted the required regulatory analyses. The agencies
conducted regulatory analysis pursuant to PRA and RFA for all 54
regulations. Agencies also conducted the analyses required under their
authorizing statutes. Specifically, CFTC and SEC individually or
jointly issued 39 regulations and considered their potential impact,
including their benefits and costs in light of each agency’s
respective public interest considerations.
* Agencies issued 19 major rules. Of the 54 regulations that were
issued and became effective between July 21, 2011, and July 23, 2012,
the agencies identified 19 as being major rules-—that is, resulting in
or likely to result in a $100 million annual impact on the economy.
Specifically, CFTC issued 10 major rules; SEC issued 5 major rules;
CFTC and SEC jointly issued 2 major rules; the Federal Reserve issued
1 major rule; and Treasury issued 1 major rule.[Footnote 30]
* One of the 19 major rules was subject to E.O. 12866 and its benefit-
cost analysis requirement. Of the agencies that issued major rules,
only Treasury is subject to E.O. 12,866, which requires a formal
assessment of the benefits and costs of an economically significant
rule. Thus, as required, Treasury analyzed the benefits and costs of
its proposed major rule.[Footnote 31]
* Agencies considered the benefits and/or costs in the majority of
their rules, but did not generally quantify them. As part of their
regulatory analyses or in response to public comments received on
their proposed rules, the agencies frequently discussed the potential
benefits and costs of their rules. For instance, CFTC and SEC asked
for public comments and data on the benefits and costs in all of their
proposed rules, and the other regulators generally asked for public
comments on the costs and, in many cases, benefits of their proposed
rules. For the 54 substantive Dodd-Frank Act regulations that we
reviewed, 49 regulations included discussions of potential benefits or
costs. The cost discussions primarily were qualitative except for the
PRA analysis, which typically included quantitative data (such as
hours or dollars spent to comply with paperwork-related requirements).
Other potential costs, however, were less frequently quantified. In
comparison, the benefit discussions largely were qualitative and
framed in terms of the objectives of the rules.
Regulators Generally Developed Selected Major Rules in Ways Consistent
with the Principles, but not Certain Key Elements, of the OMB Guidance:
Although independent federal financial regulators are not required to
follow OMB’s Circular A-4 when developing regulations, they told us
that they try to follow this guidance in principle or spirit. As
discussed in more detail below, we previously found that the policies
and procedures of these agencies did not fully reflect OMB guidance
and recommended that they incorporate the guidance more fully in their
rulemaking policies and procedures.[Footnote 32] To assess the extent
to which the regulators follow Circular A-4, we examined four major
rules (see table 2). Specifically, we examined whether the regulators
(1) identified the problem to be addressed by the regulation and the
significance of the problem; (2) considered alternatives reflecting
the range of statutory discretion; and (3) assessed the benefits and
costs of the regulation.
Table 2: Summary of Four Major Rules Reviewed;
Rulemaking: Real-Time Public Reporting of Swap Transaction Data;
Responsible regulator: CFTC;
Rule synopsis: Provides standards for the method and timing of real-
time public reporting; swap transaction and pricing data to be
publicly disseminated in real-time; and time delays for public
dissemination of swap transaction and pricing data.
Rulemaking: Debit Card Interchange Fees and Routing;
Responsible regulator: Federal Reserve;
Rule synopsis: Provides standards for reasonable and proportional
interchange transaction fees for electronic debit transactions,
exemptions from the interchange transaction fee limitations,
prohibitions on evasion and circumvention, prohibitions on payment
card network exclusivity arrangements and routing restrictions for
debit card transactions, and reporting requirements for debit card
issuers and payment card networks.
Rulemaking: Securities Whistleblower Incentives and Protections;
Responsible regulator: SEC;
Rule synopsis: Provides for payment of awards, subject to certain
limitations and conditions, to whistleblowers who voluntarily provide
SEC with original information about a violation of the securities laws
that leads to the successful enforcement of an action brought by SEC
that results in monetary sanctions exceeding $1,000,000.
Rulemaking: Assessment of Fees on Large Bank Holding Companies and
Nonbank Financial Companies Supervised by the Federal Reserve Board to
Cover the Expenses of the Financial Research Fund;
Responsible regulator: Treasury;
Rule synopsis: Provides standards directing how Treasury will (a)
determine which companies will be subject to an assessment fee, (b)
estimate the total expenses that are necessary to carry out the
activities to be covered by the assessment, (c) determine the
assessment fee for each of these companies, and (d) bill and collect
the assessment fee from these companies.
Source: GAO summary of information from the Federal Register.
[End of table]
While the regulators identified the problem to be addressed in their
rule proposals, CFTC, the Federal Reserve, and SEC did not present
benefit-cost information in ways consistent with certain key elements
of OMB’s Circular A-4. For example, CFTC and SEC did not evaluate the
benefits and costs of regulatory alternatives they considered for key
provisions compared to their chosen approach. Also, because of the
lack of data and for other reasons, the agencies generally did not
quantitatively analyze the benefits and, to a lesser degree, costs in
their rules. Agencies’ approaches for calculating a baseline against
which to compare benefits and costs of regulatory alternatives in
their analysis varied, and agency staffs told us that the lack of data
complicated such efforts.
Evaluation of Alternative Approaches in Proposed Rules:
Two of the major rules we reviewed did not evaluate alternative
approaches for key provisions in their rule proposals, but the final
rule releases did evaluate alternatives considered by the agencies. In
implementing the Dodd-Frank provisions, the agencies exercised
discretion in designing the various requirements that composed their
rules, such as defining key terms and determining who will be subject
to the regulations and how. In their rule proposals, CFTC and SEC
identified alternative approaches for key provisions of their rule
proposals. For example, CFTC identified the consolidated tape
approach-—which is used in the U.S. securities markets to publicly
report data on securities—-as an alternative method for distributing
swap transaction data in real time. SEC considered requiring potential
whistleblowers to use in-house complaint and reporting procedures
before they make a whistleblower submission to SEC. However, CFTC and
SEC generally did not evaluate the benefits and costs of their
proposed rules’ requirements compared to such alternative
requirements. Instead, their rule proposals only presented the
proposed set of requirements composing their rules and discussed the
potential benefits and costs of their overall regulatory approaches.
As part of their proposed rules, CFTC and SEC asked the public for
comments on a number of questions, including about possible
alternatives to proposed requirements.[Footnote 33] In their final
rules, CFTC and SEC noted that they considered alternatives provided
by commenters on the proposed rules and revised their rules, so as to
reduce regulatory burden or improve the effectiveness of the rules.
This approach generally is consistent with each agency’s guidance on
regulatory analysis.[Footnote 34] However, OMB guidance notes that
good regulatory analysis is designed to inform the public and other
parts of the government of the effects of alternative actions. Without
information about the agency’s evaluation of the benefits and costs of
alternatives for key provisions, interested parties may not have a
clear understanding of the assumptions underlying the rule’s
requirements, which could hinder their ability to comment on proposed
rules.
One of the rules we reviewed identified the alternative approaches but
did not describe the reasons for choosing one alternative over another
in its rule proposal. The Federal Reserve identified several
alternative approaches for key provisions in the rule proposal for
implementing the interchange fee rule and some of their potential
benefits and costs. However, it did not determine which of the
alternatives would produce greater net benefits or be more cost-
effective. Instead, the Federal Reserve asked the public to comment on
which alternatives might be preferable to the others based on several
factors, including benefits and costs. Federal Reserve staff told us
that they took this approach because it was difficult to predict how
market participants would respond to the rule. They said that they had
discussions with senior management about alternative approaches and
analyzed the costs and benefits of the alternatives, including how
alternatives could have different impacts on different market
participants, but this information was not contained in the proposed
rule. In the final rule, responding to public comments, the Federal
Reserve selected one alternative over the other alternatives and
provided reasons for the selection. Without information about the
rationale for selecting one alternative over another in the proposed
rule, interested parties may not know how to effectively gauge the
magnitude of the potential effects, which could hinder their ability
to comment on the proposed rule.
Only one rule that we reviewed identified and evaluated alternative
regulatory approaches. In its rule proposal, Treasury determined that
the fee assessment rule was a significant regulatory action under E.O.
12,866 and, thus, conducted a regulatory impact assessment. In its
proposal, Treasury identified, evaluated, and discussed several
alternative regulatory approaches. Treasury evaluated the impact of
alternative approaches on interested parties and selected the approach
it viewed as equitable and cost-effective, consistent with the OMB
guidance.
Quantitative Analysis of Benefits and Costs of Major Rules:
The regulators generally did not quantitatively analyze the benefits
and, to a lesser degree, costs of the rules we reviewed. CFTC, the
Federal Reserve, and SEC did not quantitatively analyze the benefits
of these rules. CFTC and SEC monetized and quantified paperwork-
related costs under PRA, but did not quantify any other costs. Federal
Reserve staff told us that they monetized some of the direct costs of
the debit card interchange fee rule. Specifically, they conducted a
survey to determine an average debit card interchange fee in 2009 and
used that data to help establish the debit card interchange fee cap
under the rule. However, while the debit card interchange fee cap
information was included in the proposed rule, measures of revenue
loss that could result from the rule were not included.[Footnote 35]
In contrast to the other rules we reviewed, Treasury monetized and
quantified some costs of the rule beyond paperwork-related costs.
Specifically, Treasury provided a range of estimated assessment
amounts that described the approximate size of the transfer from
assessed companies to the government.
As we have reported, the difficulty of reliably estimating the costs
of regulations to the financial services industry and the nation has
long been recognized, and the benefits of regulation generally are
regarded as even more difficult to measure. Similarly, Circular A-4
recognizes that some important benefits and costs may be inherently
too difficult to quantify or monetize given current data and methods
and recommends a careful evaluation of qualitative benefits and costs.
All of the rules we reviewed included qualitative descriptions of the
potential benefits and costs associated with the rules. The agencies
also generally included qualitative information on the nature, timing,
likelihood, location, and distribution of the benefits and costs. For
instance, in discussing the benefits of the reporting and public
dissemination requirements, CFTC stated that it anticipates that the
real-time reporting rule “will generate several overarching, if
presently unquantifiable, benefits to swaps market participants and
the public generally. These include: improvements in market quality;
price discovery; improved risk management; economies of scale and
greater efficiencies; and improved regulatory oversight.”[Footnote 36]
CFTC then went on to describe the ways in which these benefits might
accrue to market participants. However, some of the agencies did not
discuss the strengths and limitations of the qualitative information
and did not discuss key reasons why the benefits and costs could not
be quantified.
Also, the regulators did not consistently present analysis of any
important uncertainties connected with their regulatory decisions. For
instance, the Federal Reserve stated that the potential impacts of the
debit card interchange fee rule depended in large part on the reaction
of certain market actors to the rule. In contrast, we did not find a
discussion of any important uncertainties associated with SEC’s
whistleblower rules, but SEC staff told us that the inherent
uncertainties in making predictions about human behavior was a key
reason why it was not possible to engage in a quantitative analysis of
the rule. However, we found that the agencies generally based their
analyses on the best reasonably available, peer-reviewed economic
information. Treasury described certain direct costs associated with
complying with the fee assessment rule. Treasury used economic
reasoning to identify some benefits or types of benefits associated
with the rule, particularly in considering the choice of assessment
methodology, which was the area of discretion left by Congress to the
agency.
Establishment of Baseline for Analysis:
We also found the regulators’ approaches for calculating a baseline
against which to compare benefits and costs of regulatory approaches
varied. OMB’s Circular A-4 states that the baseline should be the best
assessment of the way the world would look absent the proposed action.
In cases where substantial portions of the rule may simply restate
statutory requirements that would be self-implementing, Circular A-4
provides for use of a prestatute baseline—-that is, the baseline
should reflect the status quo before the statute was enacted. However,
the guidance further states that if the agency is able to determine
where it has discretion in implementing a statute, it can use a post-
statute baseline to evaluate the discretionary elements of the action.
CFTC and SEC both did not establish post-statute baselines and instead
evaluated the benefits and costs of the discretionary elements of
their rules in terms of statutory objectives. Specifically, CFTC
evaluated each discretionary element of the real-time reporting rule
based on whether it met the statutory objectives to reduce risk,
increase transparency, and promote market integrity.[Footnote 37]
Similarly, SEC evaluated each discretionary element of the
whistleblower protection rule according to four broad objectives based
on statutory goals and the nature of public comments.[Footnote 38] We
found that the Federal Reserve generally took this approach in
developing the debit card interchange fee rule. In contrast, Treasury,
which is subject to E.O. 12,866, used a post-statute baseline to
evaluate the discretionary elements of the fee assessment rule. SEC
staff said they would have described the analysis somewhat differently
under their new economic analysis guidance (discussed below), which
directs staff to consider the overall economic impacts, including both
those attributable to congressional mandates and those that result
from an exercise of discretion. SEC’s guidance states that this
approach often will allow for a more complete picture of a rule’s
economic effects, particularly because there are many situations in
which it is difficult to distinguish between the mandatory and
discretionary components of a rule.
Agency staffs told us developing a baseline from which to assess the
benefits and costs of what would have happened in the absence of a
regulation was complicated by the lack of reliable data to quantify
the benefits and costs. For example, CFTC staff told us that they were
challenged because little public data were available about the opaque
swaps market. Moreover, because the rule created a new regulatory
regime, CFTC did not have the data needed for the analysis. Instead,
CFTC had to rely on market participants to voluntarily provide it with
proprietary data. CFTC staff said that they did receive some
proprietary data but that they were incomplete. Similarly, for the
whistleblower protection rule, SEC staff said that they asked the
public for data in their draft rule but did not receive any. In the
absence of data, SEC cited related research in its rule release, but
staff noted that they were reluctant to weigh this research too
heavily because the programs covered in the research differed in
important respects from SEC’s program. In addition, Federal Reserve
staff said that quantifying the effects of the debit card interchange
fee rule was a major challenge because of the lack of data.
Some Agencies’ Guidance on Regulatory Analysis Continues to Omit Key
Elements of OMB’s Regulatory Guidance:
Although not subject to E.O. 12,866 and, in turn, OMB Circular A-4,
most of the federal regulators told us that they try to follow
Circular A-4 in principle or spirit.[Footnote 39] In our previous
review, we found that the policies and procedures of these regulators
did not fully reflect OMB guidance and recommended that they
incorporate the guidance more fully in their rulemaking policies and
procedures. For example, each federal regulator has issued guidance
generally explaining how its staff should analyze the benefits and
costs of the regulatory approach selected, but unlike the OMB
guidance, such guidance generally does not encourage staff to identify
and analyze the benefits and costs of available alternative
approaches. Since we issued our report, OCC and SEC have revised their
guidance, but the other agencies have not yet done so. CFTC last
revised its guidance in May 2011, and in May 2012 it signed a
Memorandum of Understanding with OMB that allows OMB staff to provide
technical assistance to CFTC staff as they consider the benefits and
costs of proposed and final rules.[Footnote 40]
Issued in March 2012, SEC guidance on economic analysis for
rulemakings closely follows E.O. 12,866 and Circular A-4.[Footnote 41]
Specifically, SEC’s guidance defines the basic elements of good
regulatory economic analysis in a manner that closely parallels the
elements listed in Circular A-4: (1) a statement of the need for the
proposed action; (2) the definition of a baseline against which to
measure the likely economic consequences of the proposed regulation;
(3) the identification of alternative regulatory approaches; and (4)
an evaluation of the benefits and costs—-both quantitative and
qualitative—-of the proposed action and the main alternatives. In
addition, the guidance explains these elements and describes the ways
rulemaking teams can satisfy each of the elements borrowing directly
from Circular A-4. OCC guidance on economic analysis defines the
elements included in a full cost-benefit analysis in a similar fashion
and includes citations to specific sections of Circular A-4 to guide
staff through the application of each element.
For other federal financial regulators, by continuing to omit core
elements of OMB Circular A-4, their regulatory guidance may cause
staff to overlook or omit such best practices in their regulatory
analysis. In turn, the analyses produced may lack information that
interested parties (including consumers, investors, and other market
participants) could use to make more informed comments on proposed
rules. For example, in our review of four major rules, we found that
most of the agencies did not consistently discuss how they selected
one regulatory alternative over another or assess the potential
benefits and costs of available alternatives. Without information
about the benefits and costs of alternatives that agencies considered,
interested parties may not know which alternatives were considered and
the effects of such alternatives, which could hinder their ability to
comment on proposed rules. More fully incorporating OMB’s guidance
into their rulemaking guidance, as we previously recommended, could
help agencies produce more robust and transparent rulemakings.
Regulators Continue to Coordinate Informally on Rulemakings, but
Differences among Related Rules Still Exist:
Federal financial regulators have continued to coordinate on
rulemakings informally, but coordination may not eliminate the
potential for differences in related rules. Regulators have
coordinated on 19 of the 54 substantive regulations that we reviewed,
in some cases voluntarily coordinating their activities and also
extending coordination internationally. According to agency staff,
most interagency coordination during rulemaking largely was informal
and conducted at the staff level. Differences in rules could remain
after interagency coordination, because the rules reflected
differences in factors such as regulatory jurisdiction or market or
product type. While a few regulators have made progress on developing
guidance for interagency coordination during rulemaking, most have not.
Dodd-Frank Act and Regulators Recognize the Importance of Interagency
Coordination:
Both the Dodd-Frank Act and the federal financial regulators whom we
interviewed recognize the importance of interagency coordination
during the rulemaking process. In general, coordination during the
rulemaking process occurs when two or more regulators jointly engage
in activities to reduce duplication and overlap in regulations.
Effective coordination could help regulators minimize or eliminate
staff and industry burden, administrative costs, conflicting
regulations, unintended consequences, and uncertainty among consumers
and markets.
Recognizing the importance of coordination, the act imposes specific
interagency coordination and consultation requirements and
responsibilities on regulators or certain rules. For instance, section
171 (referred to as the Collins Amendment) requires that the
appropriate federal banking agencies establish a risk-based capital
floor on a consolidated basis.[Footnote 42] In addition, while section
619 (referred to as the Volcker Rule) does not require the federal
banking agencies (FDIC, the Federal Reserve, and OCC) to issue a joint
rule together with CFTC and SEC, it requires that they consult and
coordinate with each other, in part to better ensure that their
regulations are comparable.[Footnote 43] Further, the act broadly
requires some regulators to coordinate when promulgating rules for a
particular regulatory area. For example, under Title VII, SEC and CFTC
must coordinate and consult with each other and prudential regulators
before starting rulemaking or issuing an order on swaps or swap-
related subjects—for the express purpose of assuring regulatory
consistency and comparability across the rules or orders. The act also
includes specific requirements for CFPB. Title X requires CFPB to
consult with the appropriate prudential regulators or other federal
agencies, both before proposing a rule and during the comment process,
regarding consistency with prudential, market, or systemic objectives
administered by such agencies.
Federal financial regulators also have highlighted the importance of
coordination during the rulemaking process. For example, in testifying
about the need to coordinate agency rulemakings, FSOC’s chairperson
commented on the importance of coordinating both domestically and
internationally to prevent risks from migrating to regulatory gaps-—as
they did before the 2007-2009 financial crisis—-and to reduce U.S.
vulnerability to another financial crisis.[Footnote 44] At the same
time, we noted in a recent report that the FSOC chairperson has
recognized the challenges of coordinating on the Dodd-Frank Act
rulemakings assigned to specific FSOC members.[Footnote 45] He noted
that the coordination in the rulemaking process represented a
challenge because the Dodd-Frank Act left in place a financial system
with multiple, independent agencies with overlapping jurisdictions and
different responsibilities. However, the chairperson also noted that
certain agencies were working much more closely together than they did
before the creation of FSOC. This observation has been repeated by
other regulators, whose staffs have told us that interagency
coordination in rulemaking has increased since the passage of the Dodd-
Frank Act.
Regulators Coordinated as Required, and Such Coordination Involved
Around One-Third of Their Dodd-Frank Regulations:
We found documentation of coordination among the rulemaking agency and
other domestic or international regulators for 19 of the 54
substantive regulations that were issued and became effective between
July 21, 2011, and July 23, 2012. The act required coordination in 16
of the 19 rulemakings. Specifically, 6 of the 19 regulations were
jointly issued by two or more regulators and, thus, inherently
required interagency coordination (see table 3). The act stipulated
coordination for 10 other regulations. In the Federal Register rule
releases, we found evidence documenting the coordination required by
the act as well as voluntary coordination with additional regulators.
For example, FDIC’s regulation on “Certain Orderly Liquidation
Authority Provisions” described voluntary coordination with the
Federal Reserve.[Footnote 46] Similarly, CFTC was required to
coordinate with SEC on six swaps regulations it issued, but the agency
also coordinated with other regulators on two of those regulations.
Further, CFTC coordinated with foreign regulators on all six swaps
regulations. The act did not require coordination for the other three
regulations for which we found documentation of coordination,
indicating that the agencies voluntarily coordinated. For the
remaining 35 regulations that we reviewed, which did not require
interagency coordination, we did not find any documentation of
coordination among the agencies.[Footnote 47]
Table 3: Documentation of Coordination in Releases of Dodd-Frank
Regulations, July 21, 2011 through July 23, 2012:
Rulemaking: Risk-Based Capital Standards: Advanced Capital Adequacy
Framework—Basel II; Establishment of a Risk-Based Capital Floor;
Responsible regulator: FDIC, Federal Reserve, OCC;
Coordination requirement: Yes;
Nature of coordination: Jointly issued rule;
Voluntary coordination[A]: Yes[B].
Rulemaking: Fair Credit Reporting Risk-Based Pricing Regulations;
Responsible regulator: Federal Reserve, Federal Trade Commission;
Coordination requirement: Yes;
Nature of coordination: Jointly issued rule;
Voluntary coordination[A]: N/A.
Rulemaking: Certain Orderly Liquidation Authority Provisions under
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
Act;
Responsible regulator: FDIC;
Coordination requirement: Yes;
Nature of coordination: Act directs FDIC to consult with FSOC. FDIC
also consulted with the Federal Reserve;
Voluntary coordination[A]: Yes.
Rulemaking: Business Affiliate Marketing and Disposal of Consumer
Information;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to consult with numerous
other regulators;
Voluntary coordination[A]: N/A.
Rulemaking: Provisions Common to Registered Entities;
Responsible regulator: CFTC;
Coordination requirement: No;
CFTC consulted with prudential regulators;
Voluntary coordination[A]: Yes.
Rulemaking: Debit Card Interchange Fees and Routing;
Responsible regulator: Federal Reserve;
Coordination requirement: Yes;
Act directs the Federal Reserve to consult, as appropriate, with
numerous other regulators;
Voluntary coordination[A]: N/A.
Rulemaking: Whistleblower Incentives and Protection;
Responsible regulator: CFTC;
Coordination requirement: No;
Nature of coordination: CFTC consulted with SEC to harmonize the
agencies’ whistleblower rules;
Voluntary coordination[A]: Yes.
Rulemaking: Swap Data Repositories: Registration Standards, Duties and
Core Principles;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to coordinate with SEC and
other prudential regulators, and foreign regulators as appropriate;
Voluntary coordination[A]: N/A.
Rulemaking: Resolution Plans Required;
Responsible regulator: FDIC, Federal Reserve;
Coordination requirement: Yes;
Nature of coordination: Jointly issued rule;
Voluntary coordination[A]: N/A.
Rulemaking: Derivatives Clearing Organization General Provisions and
Core Principles;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to coordinate with SEC and
other prudential regulators, and foreign regulators as appropriate;
Voluntary coordination[A]: N/A.
Rulemaking: Real-Time Public Reporting of Swap Transaction Data;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to coordinate with SEC and
other prudential regulators, and foreign regulators as appropriate;
Voluntary coordination[A]: N/A.
Rulemaking: Swap Data Recordkeeping and Reporting Requirements;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to coordinate with SEC and
other prudential regulators, and foreign regulators as appropriate.
CFTC also consulted with the Office of Financial Research (OFR) and
the Department of the Treasury;
Voluntary coordination[A]: Yes.
Rulemaking: Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF;
Responsible regulator: CFTC, SEC;
Coordination requirement: Yes;
Nature of coordination: Jointly issued rule;
Voluntary coordination[A]: N/A.
Rulemaking: Business Conduct Standards for Swap Dealers and Major Swap
Participants With Counterparties;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to coordinate with SEC and
other prudential regulators, and foreign regulators as appropriate.
CFTC also consulted with the Department of Labor and Internal Revenue
Service;
Voluntary coordination[A]: Yes.
Rulemaking: Mutual Insurance Holding Company Treated as Insurance
Company;
Responsible regulator: FDIC;
Coordination requirement: Yes;
Nature of coordination: Act directs FDIC to consult with FSOC in
developing this rule;
Voluntary coordination[A]: N/A.
Rulemaking: Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants;
Responsible regulator: CFTC;
Coordination requirement: Yes;
Nature of coordination: Act directs CFTC to coordinate with SEC and
other prudential regulators, and foreign regulators as appropriate;
Voluntary coordination[A]: N/A.
Rulemaking: Alternatives to the Use of External Credit Ratings in the
Regulations of the OCC;
Responsible regulator: OCC;
Coordination requirement: No;
Nature of coordination: OCC consulted with FDIC;
Voluntary coordination[A]: Yes.
Rulemaking: Further Definition of "Swap Dealer," "Security-Based Swap
Dealer," "Major Swap Participant," "Major Security-Based Swap
Participant" and "Eligible Contract Participant;"
Responsible regulator: CFTC, SEC;
Coordination requirement: Yes;
Nature of coordination: Jointly issued rule;
Voluntary coordination[A]: N/A.
Rulemaking: Calculation of Maximum Obligation Limitation;
Responsible regulator: FDIC, Treasury;
Coordination requirement: Yes;
Nature of coordination: Jointly issued rule, in consultation with FSOC;
Voluntary coordination[A]: N/A.
Source: GAO analysis of the Dodd-Frank Act and the Federal Register.
Note: The rules are ordered by the date that each rule became
effective.
[A] Some regulators coordinated with domestic and/or international
regulators beyond what was required under the Dodd-Frank Act and, in
some cases, where coordination was not required. For rules marked “not
applicable” (N/A), the agencies did not coordinate with any agencies
beyond what was required.
[B] While section 171 of the Dodd-Frank Act did not mandate that the
rule establishing a risk-based capital floor be jointly issued, it did
require that the floor be issued on a consolidated basis. To address
this provision of the act, the federal banking agencies decided to
issue a joint rule.
[End of table]
Review of Select Major Rules Highlights Similarities and Differences
in Interagency Coordination and the Potential for Related Rules to
Differ Despite Coordination:
Of the 19 regulations that we identified as having interagency
coordination, we selected three regulations to review in depth and
sought to cover as many regulators as possible that were required to
coordinate under the Dodd-Frank Act (see table 4). We examined when,
how, and the extent to which federal financial regulators coordinated.
We also examined efforts undertaken by the regulators to avoid
conflicts in the rulemakings.
Table 4: Summary of Three Major Rules Reviewed:
Rulemaking: Risk-Based Capital Standards: Advanced Capital Adequacy
Framework—Basel II; Establishment of a Risk-Based Capital Floor;
Description of coordination: The act requires the appropriate federal
banking agencies (i.e., FDIC, OCC and the Federal Reserve) to
establish minimum risk-based capital requirements on a consolidated
basis for insured depository institutions, depository institution
holding companies, and nonbank financial companies supervised by the
Federal Reserve.
Rulemaking: Further Definition of "Swap Dealer," "Security-Based Swap
Dealer," "Major Swap Participant," "Major Security-Based Swap
Participant" and "Eligible Contract Participant;"
Description of coordination: The act directs CFTC and SEC, in
consultation with the Federal Reserve, jointly to further define the
terms "Swap Dealer," "Security-Based Swap Dealer," "Major Swap
Participant," "Major Security-Based Swap Participant," and "Eligible
Contract Participant."
Rulemaking: Real-Time Public Reporting of Swap Transaction Data
Description of coordination: The act directs CFTC to promulgate rules
providing for the public availability of swap data in real-time to
enhance price discovery. The rule introduces definitions, processes,
entities, and other items relevant to the real-time public reporting
of swap transaction data.
Source: GAO analysis of information from the Dodd-Frank Act and the
Federal Register.
[End of table]
Most Coordination for the Rulemakings Occurred Early in the Process
and Was Informal:
The regulators held some formal interagency meetings early on in the
rulemaking process; however, coordination was mostly informal and
conducted through e-mail, telephone conversations, and one-on-one
conversations between staff. For example, at the initiation stage of
the risk-based capital rulemaking, FDIC, OCC, and the Federal Reserve
held a principal-level meeting to discuss the major issues relating to
the interpretation of the statutory requirement. After this meeting,
staffs formed an interagency working group, comprised of staff from
each agency who, according to Federal Reserve staff, continually have
worked together on numerous capital rules and therefore have a very
close working relationship. Likewise, agency staffs said that after
the initial formal meetings on the other rulemakings that we reviewed,
coordination revolved around informal staff-level discussions.
Coordination during the proposed rule drafting stage typically was
characterized by staff-level conversations primarily through telephone
calls or e-mails and some face-to-face meetings. Staffs would contact
each other as issues arose to work out conflicts or differences in
agency viewpoints. When issues could not be resolved at the staff
level, they were escalated to senior management, but most issues were
resolved and most coordination occurred at the staff level throughout
the drafting of the proposed rules, according to agency staffs. For
all three rulemakings reviewed, agency staffs coordinated at least
weekly through the proposal stage with the frequency of coordination
escalating as the proposed rule neared issuance.
After receiving public comments and while preparing the final rule,
agency staffs told us that they continued to coordinate with each
other, but the need for and level of interagency coordination varied
by rule. For instance, OCC, Federal Reserve, and FDIC staffs said that
by the time they reached the stage of drafting the final risk-based
capital rule, meetings were less frequent because the group already
had worked out most of the details. Coordination between CFTC and SEC
also decreased during this stage of the real-time reporting
rulemaking. Conversely, CFTC and SEC staffs said that interagency
coordination continued to be frequent while drafting the final swaps
entities rule because after the proposed rule was issued some
differences in underlying definitions remained, such as the definition
for “highly leveraged.” The commissions used public comments to the
proposed rule to help them interpret and come to consensus on the
definitions. CFTC and SEC staffs met regularly in this period to
refine drafts, resolve issues, and convene an industry roundtable.
Coordination with International Regulators on the Three Rulemakings
Varied:
The extent to which agencies coordinated with international regulators
varied in the three rulemakings that we reviewed. For example, CFTC
and SEC coordinated with international regulators on swap rulemakings.
For the real-time reporting rule, CFTC coordinated with foreign
regulators, such as the Financial Services Authority and the European
Commission, which provided ideas on data reporting. On the swap
entities rule, CFTC and SEC staffs said that they participated in
numerous conference calls and meetings with various international
regulators.
In contrast, the banking regulators did not meet with any
international regulators on the risk-based capital rule. The agency
staffs said that they were implementing a straightforward statutory
provision that required little interpretation and little amendment to
the existing rules; therefore, staffs said they did not need to seek
input from international regulators as to how to implement U.S. law.
Staffs said that for less narrowly scoped rules, where regulators have
more discretion, they are more proactive in reaching out to
international regulators. FDIC staff cited, as an example, the risk
retention rule, for which they reached out to the European Union to
understand their approach.[Footnote 48]
Regulators Worked to Resolve Conflicts but Some Differences Remained:
Regulators who were responsible for the three rulemakings that we
reviewed said that they tried to identify potential areas of
duplication or conflict involving the rules. For the risk-based
capital rule, the banking regulators held discussions on regulatory
conflict and duplication and concluded that none would be created by
this rule. For the swap entity rule and the real-time reporting rule,
CFTC and SEC identified potential areas of conflict, which they were
able to address through coordination. For example, when developing the
real-time reporting rule, CFTC and SEC initially had different
approaches about what type of entity would be in charge of
disseminating swap transaction data. SEC proposed that only swap data
repositories would be required to disseminate real-time data, and CFTC
initially proposed to require several different entities to do so.
[Footnote 49] When CFTC issued its final rule, it changed its approach
to mirror SEC’s proposal, deciding that only swap data repositories
would be required to disseminate real-time swap data. Agency staffs
said that this harmonization should help to minimize the compliance
cost burden placed on market participants and allow for more efficient
operation of systems for the public dissemination of swap and security-
based swap market data.
In some areas, differences in rules remained after interagency
coordination, due to differences in regulatory jurisdiction. In
particular, while CFTC and SEC reached consensus on the text for the
jointly issued swap entities rule, the regulators outlined different
approaches in certain parts of the rule as a result of their
regulatory jurisdiction over different product sets. For example, some
of the language of the definitions for “major swap participant” and “
major security-based swap participant” differs because the agencies
each have jurisdiction over different products and some of these
products have different histories, markets, and market sizes,
according to CFTC and SEC staff. Also, in the real-time reporting
rule, CFTC, in its final rule, defined specific data fields to be
reported, while SEC, in its proposed rule, outlined broad data
categories and required swap data repositories to develop specific
reporting protocols. Agency staffs stated that while the approaches
were different, they were not inconsistent. The key factors the
regulators considered were whether the rules achieved the policy
objectives and whether the regulated entities could comply with both
agencies’ rules given their differences. It was determined that swap
data repositories could develop data reporting protocols that would
comply with both agencies’ rules.
To document and communicate preliminary staff views on certain issues
to senior management, regulators use term sheets throughout the
rulemaking process. Although term sheets are primarily internal
documents, they were shared with staff at other regulators to
communicate views and elicit comments. These term sheets serve as a
formal mechanism to help initiate discussions of differences in the
regulators’ positions. Term sheets generally are drafted internally by
staff at each agency, shared between or among agency staff, and shared
with agency principals or senior management. CFTC and SEC created term
sheets for both the swap entities rule and the real-time reporting
rule. Conversely, for the risk-based capital rule, the banking
regulators did not create a term sheet because, according to OCC
staff, the statutory requirements for this rule were explicit and
therefore a term sheet was not required. However, staff noted that
this was different from a standard rulemaking where they typically
would draft and share a term sheet.
Most Agencies Continue to Lack Formal Policies and Procedures to Guide
Interagency Coordination:
While a few agencies have made progress on developing policies for
interagency coordination for their rulemaking, most have not. In
November 2011, we reported that most of the federal financial agencies
lacked formal policies or procedures to guide their interagency
coordination in the rulemaking process.[Footnote 50] Federal financial
regulators informally coordinated on some of the final rules that we
reviewed, but most of the agencies lacked written policies and
procedures to guide their interagency coordination. Specifically,
seven of nine agencies did not have written policies and procedures to
facilitate coordination on rulemaking.[Footnote 51] The written
policies and procedures that existed were limited in their scope or
applicability. The remaining two regulators, FDIC and OCC, had
rulemaking policies that include guidance on developing interagency
rules. As we previously reported, documented policies can help ensure
that adequate coordination takes place, help to improve interagency
relationships, and prevent the duplication of efforts at a time when
resources are extremely limited.
Since our November 2011 report, we found that OCC and CFPB have
further developed guidance on interagency coordination, but the other
agencies have not. CFPB has developed guidance that outlines the agency’
s approach to interagency consultation in rulemaking. The document
generally describes two rounds of consultation when drafting the
proposed rule and two rounds when addressing comments and drafting the
final rule. The guidance highlights the points in a rulemaking at
which staff should reach out to other regulators, the purpose of
consultation, and the length of time to allow for responses from
regulators. Similarly, OCC updated its rulemaking policy to include
more detail on what steps should be taken in coordination and who
should be involved.
In our November 2011 report, we recommended that FSOC work with the
federal financial regulators to establish formal coordination policies
for rulemaking that clarify issues, such as when coordination should
occur, the process that will be used to solicit and address comments,
and what role FSOC should play in facilitating coordination. While
FSOC has not implemented this recommendation, staff told us that they
have developed coordination processes around specific areas of the
Dodd-Frank Act. For example, FSOC staff said that they have
coordinated closely with FDIC on all rulemakings under Title II. In
addition, FSOC developed written guidance for coordination on
rulemakings for enhanced prudential standards for bank holding
companies with $50 billion or more in total consolidated assets and
nonbank financial companies designated by FSOC for Federal Reserve
supervision under sections 165 and 166 of the act. However, in a
September 2012 report, we noted that a number of industry
representatives questioned why FSOC could not play a greater role in
coordinating member agencies’ rulemaking efforts.[Footnote 52] In that
report, we further noted that the FSOC chairperson, in consultation
with the other FSOC members, is responsible for regular consultation
with the financial regulatory entities and other appropriate
organizations of foreign governments or international organizations.
We also reiterated our previous recommendation by stating that FSOC
should establish formal collaboration and coordination policies for
rulemaking.
Impacts of the Dodd-Frank Act Have Not Yet Fully Materialized and
Remain Uncertain:
The full impact of the Dodd-Frank Act remains uncertain. Although
federal agencies continue to implement the act through rulemakings,
much work remains. For example, according to one estimate, regulators
have finalized less than half of the total rules that may be needed to
implement the act.[Footnote 53] Furthermore, sufficient time has not
elapsed to measure the impact of those rules that are final and
effective. As we previously noted, even when the act’s reforms are
fully implemented, it will take time for the financial services
industry to comply with the array of new regulations.[Footnote 54] The
evolving nature of implementation makes isolating the effects of the
Dodd-Frank Act on the U.S. financial marketplace difficult. This task
is made more difficult by the many factors that can affect the
financial marketplace, including factors that could have an even
greater impact than the act.
Recognizing these limitations and difficulties, we developed a
multipronged approach to analyze current data and trends that might be
indicative of some of the Dodd-Frank Act’s initial impacts, as
institutions react to issued and expected rules. First, the act
contains provisions that serve to enhance the resilience of certain
bank and nonbank financial companies and reduce the potential for
financial distress in any one of these companies to affect the
financial system and economy. Specifically, the Dodd-Frank Act
requires the Federal Reserve to impose enhanced prudential standards
and oversight on bank holding companies with $50 billion or more in
total consolidated assets and nonbank financial companies designated
by FSOC.[Footnote 55] We developed indicators to monitor changes in
certain SIFI characteristics. Although the indicators may be
suggestive of the act’s impact, our indicators do not identify causal
links between their changes and the act. Further, many other factors
can affect SIFIs and, thus, the indicators. As new data become
available, we expect to update and, as warranted, revise our
indicators and create additional ones to cover other provisions.
Second, we used difference-in-difference analysis to infer the act’s
impact on the provision of credit by and the safety and soundness of
bank SIFIs. The analysis is subject to limitations, in part because
factors other than the act could be affecting these entities. Third,
we analyzed the impact of several major rules that were issued
pursuant to the Dodd-Frank Act and have been final for around a year
or more.
Indicators Suggest Increased SIFI Resiliency and Provide Baselines for
Future Analysis:
The 2007-2009 financial crisis demonstrated that some financial
institutions, including some nonbank financial companies (e.g., AIG),
had grown so large, interconnected, complex, and leveraged, that their
failure could threaten the stability of the U.S. financial system and
the global economy. Financial institutions, markets, and
infrastructure that make up the U.S. financial system provide services
to the U.S. and global economies, such as helping to allocate funds,
allowing households and businesses to manage their risks, and
facilitating financial transactions that support economic activity.
The sudden collapses and near-collapses of major financial
institutions, including major nonbank financial institutions, were
among the most destabilizing events of the 2007-2009 financial crisis.
In addition, large, complex financial institutions that are perceived
to be “too big to fail” can increase uncertainty in periods of market
turmoil and reinforce destabilizing reactions within the financial
system.
According to its legislative history, the Dodd-Frank Act contains
provisions intended to reduce the risk of failure of a large, complex
financial institution and the damage that such a failure could do to
the economy.[Footnote 56] Such provisions include (1) establishing
FSOC to identify and respond to emerging threats to the stability of
the U.S. financial system; (2) authorizing FSOC to designate a nonbank
financial company for Federal Reserve supervision if FSOC determines
it could pose a threat to the financial stability of the United States
based on the company’s size, leverage, interconnectedness, or other
factors; and (3) directing the Federal Reserve to impose enhanced
prudential standards and oversight on bank holding companies with $50
billion or more in total consolidated assets (referred to as bank
SIFIs in this report) and nonbank financial companies designated by
FSOC (referred to as nonbank SIFIs in this report). The Dodd-Frank Act
also is intended to reduce market expectations of future federal
rescues of large, interconnected, and complex firms using taxpayer
dollars.[Footnote 57] Under the act, bank holding companies with $50
billion or more in total consolidated assets and nonbank financial
companies designated by FSOC for Federal Reserve supervision are
required to develop plans for their rapid and orderly resolution.
Additionally, FDIC is given new orderly liquidation authority to act
as a receiver of a troubled financial firm whose failure could
threaten financial stability so as to protect the U.S. financial
system and the wider economy.
Some Dodd-Frank Act provisions may result in adjustments to SIFIs’
size, interconnectedness, complexity, leverage, or liquidity over
time.[Footnote 58] We developed indicators to monitor changes in some
of these SIFI characteristics.[Footnote 59] The size and complexity
indicators reflect the potential for a single company’s financial
distress to affect the financial system and economy. The leverage and
liquidity indicators reflect a SIFI’s resilience to shocks or its
vulnerability to financial distress. FSOC has not yet designated any
nonbank financial firms for Federal Reserve supervision.[Footnote 60]
As a result, we focus our analysis on U.S. bank SIFIs.[Footnote 61]
Our indicators have limitations. For example, the indicators do not
identify causal links between changes in SIFI characteristics and the
act. Rather, the indicators track or begin to track changes in the
size, complexity, leverage, and liquidity of SIFIs over the period
since the Dodd-Frank Act was passed to examine whether the changes are
consistent with the act. However, other factors—including the economic
downturn, international banking standards agreed upon by the Basel
Committee on Banking Supervision (Basel Committee), European debt
crisis, and monetary policy actions—-also affect bank holding
companies and, thus, the indicators.[Footnote 62] These factors may
have a greater effect than the Dodd-Frank Act on SIFIs. In addition,
some rules implementing SIFI-related provisions have not yet been
proposed or finalized. Thus, trends in our indicators include the
effects of these rules only insofar as SIFIs have changed their
behavior in response to issued rules and in anticipation of expected
rules. In this sense, our indicators provide a baseline against which
to compare future trends.
Table 5 summarizes the changes in our bank SIFI indicators. The size
indicators do not provide a clear trend between the third quarter of
2010 and the second quarter of 2012. Additionally, we have only one
data point in the complexity indicator, but our data suggest that the
largest bank SIFIs generally were more complex organizationally than
other bank SIFIs. Lastly, the indicators suggest that bank SIFIs, on
average, have become less leveraged since the third quarter of 2010,
and their liquidity also appears to have improved. Trends in our
leverage and liquidity indicators appear to be consistent with an
improvement in SIFIs’ resilience to shocks.
Table 5: Summary of Trends in Indicators for U.S. Bank SIFIs, from
Third Quarter 2010 through Second Quarter 2012
Size – Size captures the amount of financial services or financial
intermediation that a bank holding company provides;
Indicator (italicized) and description of trend: The [italics: number
of large bank SIFIs] remained the same, and the [italics: number of
other bank SIFIs] decreased slightly.[A]
Median [italics: assets for large bank SIFIs] and median [italics:
assets for other bank SIFIs] increased slightly.[A, B]
The median [italics: market share (measured in assets) for bank SIFIs]
remained relatively constant.[B]
Characteristic: Consistent with decreased, no change, or increased
spillover effects or resilience? Consistent with no change in
spillover effects;
Characteristic: Interconnectedness – Interconnectedness captures
direct or indirect linkages between financial institutions that may
transmit distress from one institution to another;
Indicator (italicized) and description of trend: None[C];
Characteristic: Consistent with decreased, no change, or increased
spillover effects or resilience? N/A
Characteristic: Complexity – Operational complexity may reflect an
institution’s diverse lines of business and locations in which the
institution operates;
Indicator (italicized) and description of trend: The [italics: number
of legal entities of large bank SIFIs] was large relative to other
bank SIFIs as of October 2012.[A]
Almost all large bank SIFIs have a high [italics: number or percentage
of legal entities located outside of the United States], and the
number of countries where the foreign entities are located is also
high;
Consistent with decreased, no change, or increased spillover effects
or resilience? N/A.
Characteristic: Leverage – Leverage can be defined broadly as the
ratio between some measure of risk exposure and capital that can be
used to absorb unexpected losses from the exposure. Traditionally, it
has referred to the use of debt, instead of equity, to fund an asset
and been measured by the ratio of total assets to equity on the
balance sheet;
Indicator (italicized) and description of trend: The median [italics:
tangible common equity as a percent of total assets for bank SIFIs]
increased slightly.[B]
The median [italics: tangible common equity as a percent of risk-
weighted assets for bank SIFIs] increased slightly.[B]
Consistent with decreased, no change, or increased spillover effects
or resilience? Consistent with increased resilience.
Characteristic: Liquidity – Liquidity represents the ability of an
institution to fund its assets and meet its obligations as they become
due;
Indicator (italicized) and description of trend: The median [italics:
short-term liabilities as a percent of total liabilities for bank
SIFIs] decreased.[B]
The median [italics: liquid assets as a percent of short-term
liabilities for bank SIFIs] increased.[B]
Consistent with decreased, no change, or increased spillover effects
or resilience? Consistent with increased resilience.
Sources: GAO analysis of SNL Financial data and Federal Reserve Board
data from the National Information Center.
[A] Large bank SIFIs are those with $500 billion or more in assets.
Other bank SIFIs are those with assets between $50 billion and $500
billion.
[B] To calculate the median measures, we calculated the relevant
indicator measure for each bank holding company, and then reported the
median for large bank SIFIs, the median for other bank SIFIs, the
median for non-SIFI banks, or the median for the entire group.
[C] We plan to develop indicators for interconnectedness in future
reports.
[End of table]
SIFI Size:
The three size indicators generally did not show a clear change in the
size of U.S. bank SIFIs between 2010 and 2012. In 2009, the Federal
Reserve chairman noted that regulators have strong incentives in a
crisis to prevent the failure of a large, highly interconnected
financial firm because of the risks such a failure would pose to the
financial system and the broader economy.[Footnote 63] He also noted
that market participants’ belief that a particular firm is considered
too big to fail has many undesirable effects, such as reducing market
discipline and providing an artificial incentive for firms to grow to
be perceived as too big to fail. The Dodd-Frank Act contains
provisions that may discourage or inhibit large financial institutions
(including those we refer to as SIFIs) from increasing their size. For
example, the act’s $50 billion-asset threshold for determining which
bank holding companies are subject to enhanced regulation by the
Federal Reserve may discourage certain institutions from increasing or
encourage others to reduce their assets to avoid such regulation.
Also, some provisions and related rules allow or require regulators to
limit, in certain circumstances, the size of a SIFI by imposing
restrictions on its growth, activities, or operations. Although
implicit or explicit limits on the size of a financial institution may
prevent the institution from growing so large that it is perceived by
the market as too big to fail, such limits also may prevent the
institution from achieving economies of scale and benefiting from
diversification.[Footnote 64]
We developed three indicators of size. The first indicator tracks the
number of bank SIFIs. The second indicator measures a SIFI’s size
based on the total assets on its balance sheet. The third indicator
measures the extent to which industry assets are concentrated among
the individual SIFIs, reflecting a SIFI’s size relative to the size of
the industry. A limitation of these indicators is that they do not
include an institution’s off-balance sheet activities and thus may
understate the amount of financial services or intermediation an
institution provides. Furthermore, asset size alone is not an accurate
determinant of systemic risk, as an institution’s systemic risk
significance also depends on other factors, such as its complexity and
interconnectedness.
As shown in figure 1, seven U.S. bank SIFIs had more than $500 billion
in total consolidated assets (referred to as large bank SIFIs in this
report) in the third quarter of 2010 and in the second quarter of
2012.[Footnote 65] The large bank SIFIs were considerably larger than
the other bank SIFIs.
Figure 1: Total Assets of U.S. Bank SIFIs, as of the Third Quarter of
2010 and Second Quarter of 2012:
[Refer to PDF for image: horizontal bar graph]
2012 Q2 dollars:
Asset ranking: 1;
2012 assets (2nd quarter): $2.29 trillion;
2010 assets (3rd quarter): $2.21 trillion.
Asset ranking: 2;
2012 assets (2nd quarter): $2.16 trillion;
2010 assets (3rd quarter): $2.42 trillion.
Asset ranking: 3;
2012 assets (2nd quarter): $1.92 trillion;
2010 assets (3rd quarter): $2.05 trillion.
Asset ranking: 4;
2012 assets (2nd quarter): $1.34 trillion;
2010 assets (3rd quarter): $1.26 trillion.
Asset ranking: 5;
2012 assets (2nd quarter): $948.98 billion;
2010 assets (3rd quarter): $939.93 billion.
Asset ranking: 6;
2012 assets (2nd quarter): $825.19 billion;
2010 assets (3rd quarter): $638.36 billion.
Asset ranking: 7;
2012 assets (2nd quarter): $748.52 billion;
2010 assets (3rd quarter): $870.14 billion.
Asset ranking: 8;
2012 assets (2nd quarter): $353.14 billion;
2010 assets (3rd quarter): $300.59 billion.
Asset ranking: 9;
2012 assets (2nd quarter): $330.49 billion;
2010 assets (3rd quarter): $262.98 billion.
Asset ranking: 10;
2012 assets (2nd quarter): $317.48 billion;
2010 assets (3rd quarter): $362.07 billion.
Asset ranking: 11;
2012 assets (2nd quarter): $299.71 billion;
2010 assets (3rd quarter): $269.07 billion.
Asset ranking: 12;
2012 assets (2nd quarter): $296.70 billion;
2010 assets (3rd quarter): $203.67 billion.
Asset ranking: 13;
2012 assets (2nd quarter): $207.33 billion;
2010 assets (3rd quarter): $180.95 billion.
Asset ranking: 14;
2012 assets (2nd quarter): $200.37 billion;
2010 assets (3rd quarter): $177.36 billion.
Asset ranking: 15;
2012 assets (2nd quarter): $178.56 billion;
2010 assets (3rd quarter): $179.11 billion.
Asset ranking: 16;
2012 assets (2nd quarter): $178.53 billion;
2010 assets (3rd quarter): $162.61 billion.
Asset ranking: 17;
2012 assets (2nd quarter): $178.31 billion;
2010 assets (3rd quarter): $180.7 billion.
Asset ranking: 18;
2012 assets (2nd quarter): $146.89 billion;
2010 assets (3rd quarter): $149.97 billion.
Asset ranking: 19;
2012 assets (2nd quarter): $129.31 billion;
2010 assets (3rd quarter): $140.77 billion.
Asset ranking: 20;
2012 assets (2nd quarter): $122.35 billion;
2010 assets (3rd quarter): $138.12 billion.
Asset ranking: 21;
2012 assets (2nd quarter): $117.54 billion;
2010 assets (3rd quarter): $116.16 billion.
Asset ranking: 22;
2012 assets (2nd quarter): $112.17 billion;
2010 assets (3rd quarter): $73.13 billion.
Asset ranking: 23;
2012 assets (2nd quarter): $94.46 billion;
2010 assets (3rd quarter): $83.48 billion.
Asset ranking: 24;
2012 assets (2nd quarter): $87.94 billion;
2010 assets (3rd quarter): $82.56 billion.
Asset ranking: 25;
2012 assets (2nd quarter): $86.74 billion;
2010 assets (3rd quarter): $97.30 billion.
Asset ranking: 26;
2012 assets (2nd quarter): $82.94 billion;
2010 assets (3rd quarter): [Empty].
Asset ranking: 27;
2012 assets (2nd quarter): $80.81 billion;
2010 assets (3rd quarter): $70.58 billion.
Asset ranking: 28;
2012 assets (2nd quarter): $78.66 billion;
2010 assets (3rd quarter): $75.25 billion.
Asset ranking: 29;
2012 assets (2nd quarter): $73.26 billion;
2010 assets (3rd quarter): $63.73 billion.
Asset ranking: 30;
2012 assets (2nd quarter): $66.01 billion;
2010 assets (3rd quarter): $66.52 billion.
Asset ranking: 31;
2012 assets (2nd quarter): $65.0 billion;
2010 assets (3rd quarter): [Empty].
Asset ranking: 32;
2012 assets (2nd quarter): $62.76 billion;
2010 assets (3rd quarter): $57.04 billion.
Asset ranking: 33;
2012 assets (2nd quarter): $56.62 billion;
2010 assets (3rd quarter): $55.07 billion.
Asset ranking: 34;
2012 assets (2nd quarter): $53.42;
2010 assets (3rd quarter): $52.80 billion.
$50 billion: asset threshold for bank holding company enhanced
prudential oversight and regulation.
Source: GAO analysis of SNL Financial Bureau of Economic Analysis data.
Note: Bank SIFIs are U.S. bank holding companies with $50 billion or
more in total consolidated assets. Bank SIFIs are ranked by assets as
of the second quarter of 2012, with 1 being the bank SIFI with the
most assets and 34 being the bank SIFI with the least assets. The
figure shows assets for these bank SIFIs as of the third quarter of
2010 and the second quarter of 2012 adjusted for inflation and
measured in billions of constant 2012 Q2 dollars.
[End of figure]
The three indicators show that the number and size of U.S. bank SIFIs
have remained largely the same over the past 2 years and that several
SIFIs dominate the market.
* Table 6 shows that the total number of large U.S. bank SIFIs has
remained at 7 and the total number of other bank SIFIs decreased from
29 to 27 between 2010 and the second quarter of 2012. Over the same
period, the median assets for large bank SIFIs and other bank SIFIs
increased slightly.
Table 6: Number and Median Size of U.S. Bank Holding Companies and
U.S. Bank SIFIs, at the End of Calendar Year Unless Otherwise Noted
(Assets in Billions of 2012 Q2 Dollars)
Total bank holding companies:
2010:
Number: 1,006;
Median assets: $1.0 billion;
2011:
Number: 1,014;
Median assets: $0.9 billion;
2012 Q2:
Number: 1,028;
Median assets: $0.9 billion.
Total SIFIs:
2010:
Number: 36;
Median assets: $155.7 billion;
2011:
Number: 34;
Median assets: $177.3 billion;
2012 Q2:
Number: 34;
Median assets: $162.6 billion.
Large SIFIs:
2010:
Number: 7;
Median assets: $1.2943 trillion;
2011:
Number: 7;
Median assets: $1.3255 trillion;
2012 Q2:
Number: 7;
Median assets: $1.3362 trillion.
Other SIFIs:
2010:
Number: 29;
Median assets: $114.2 billion;
2011:
Number: 27;
Median assets: $128.2 billion;
2012 Q2:
Number: 27;
Median assets: $117.5 billion.
Non-SIFIs:
2010:
Number: 970;
Median assets: $0.9 billion;
2011:
Number: 980;
Median assets: $0.9 billion;
2012 Q2:
Number: 994;
Median assets: $0.9 billion.
Source: GAO analysis of SNL Financial data.
Note: Median assets are adjusted for inflation and are measured in
billions of constant 2012 Q2 dollars. We define large bank SIFIs are
those with assets of $500 billion or more. Other bank SIFIs are those
with assets between $50 billion and $500 billion. Non-SIFI bank
holding companies are those with assets less than $50 billion but
greater than $500 million.
[End of table]
* Figure 2 shows that the median market share for large bank SIFIs was
about 7.7 percent of the industry’s total assets at the end of the
second quarter of 2012, roughly the same market share as in the third
quarter of 2010. The median market share for other bank SIFIs hovered
between 0.7 percent and 0.8 percent of the industry’s total assets
during that time frame.
Figure 2: Median Market Share for U.S. Bank Holding Companies by Size,
from First Quarter of 2006 through Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
Non-SIFI banks: More than or equal to $50 million - less than $50
billion in assets;
Other bank SIFIs: More than or equal to $50 billion - less than $500
billion in assets;
Large bank SIFIs: More than or equal to $500 billion in assets.
2006, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.92%;
Large bank SIFIs: 11.66%.
2006, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.85%;
Large bank SIFIs: 11.39%.
2006, Q3;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.86%;
Large bank SIFIs: 11.21%.
2006, Q4;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.93%;
Large bank SIFIs: 11.02%.
2007, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.93%;
Large bank SIFIs: 8.32%.
2007, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.96%;
Large bank SIFIs: 5.52%.
2007, Q3;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.74%;
Large bank SIFIs: 5.02%.
2007, Q4;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.78%;
Large bank SIFIs: 5.81%.
2008, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.82%;
Large bank SIFIs: 5.78%.
2008, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.85%;
Large bank SIFIs: 5.92%.
2008, Q3;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.79%;
Large bank SIFIs: 4.88%.
2008, Q4;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.87%;
Large bank SIFIs: 13.14%.
2009, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.79%;
Large bank SIFIs: 9.87%.
2009, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.79%;
Large bank SIFIs: 8.13%.
2009, Q3;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.81%;
Large bank SIFIs: 7.69%.
2009, Q4;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.78%;
Large bank SIFIs: 7.83%.
2010, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.84%;
Large bank SIFIs: 7.46%.
2010, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.84%;
Large bank SIFIs: 7.58%.
2010, Q3;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.81%;
Large bank SIFIs: 7.39%.
2010, Q4;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.69%;
Large bank SIFIs: 7.81%.
2011, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.74%;
Large bank SIFIs: 7.6%.
2011, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.79%;
Large bank SIFIs: 7.6%.
2011, Q3;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.78%;
Large bank SIFIs: 7.84%.
2011, Q4;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.77%;
Large bank SIFIs: 7.98%.
2012, Q1;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.67%;
Large bank SIFIs: 7.6%.
2012, Q2;
Non-SIFIs: 0.01%;
Other bank SIFIs: 0.67%;
Large bank SIFIs: 7.65%.
Source: GAO analysis of SNL Financial data.
Note: To calculate the median market shares, we calculated the market
share for each bank holding company, and then reported the median
market share for large bank SIFIs, the median for other bank SIFIs,
and the median for non-SIFI banks.
[End of figure]
Complexity of SIFIs:
Our complexity measure indicates that large U.S. bank SIFIs are likely
relatively more complex than other U.S. bank SIFIs. Interconnectedness
and complexity of operations or organizational structure are related
concepts. Interconnectedness refers to linkages among financial
companies that may transmit distress from one company to another.
Operational complexity, which reflects a company’s diverse lines of
business and locations of operation, may make interconnected firms
harder to resolve in case they fail. According to FSOC, in the years
preceding the crisis, the structure of many financial institutions had
become complex and interconnections among financial institutions were
poorly understood. The belief that highly interconnected and complex
companies were more likely to receive government support during a
financial crisis promoted moral hazard problems for such institutions.
[Footnote 66]
Some Dodd-Frank Act provisions may result in increased transparency
regarding the interconnectedness and complexity of SIFIs or in
reductions in their interconnections and complexity. For example,
Title II provides FDIC with new authority to resolve nonviable
financial firms that pose a significant threat to U.S. financial
stability. Moreover, section 165 of the act requires bank holding
companies with $50 billion or more in total consolidated assets and
nonbank financial companies designated by FSOC for Federal Reserve
supervision to submit to regulators periodic resolution plans that
describe a company's strategy for rapid and orderly resolution in the
event of material stress or failure.[Footnote 67] FSOC has recommended
that firms use the development of the plans as an opportunity to
reduce organizational complexity, and some regulators and experts have
noted that the development of the resolution plans may lead some SIFIs
to simplify their operations.[Footnote 68]
Our indicators of complexity are the number of legal entities of bank
SIFIs, the percentage of foreign legal entities of large SIFIs, and
the number of countries where they are located. An institution’s
operational complexity may reflect an institution’s diverse lines of
business and locations in which the institution operates, which are
reflected partly through its various legal structures. Consequently, a
SIFI with a large number of legal entities—particularly foreign ones
operating in different countries under different regulatory regimes—
may be more difficult to resolve than a SIFI with fewer legal entities
in fewer countries. One limitation of our indicator is that it does
not provide information on the relative complexity of SIFIs resulting
directly from their various lines of business. Additionally, changes
in the operational complexity of a SIFI may be reflected in our
indicators only insofar as they result in a change in the number of
legal entities.
The complexity indicators show that large U.S. bank SIFIs have a
relatively large number of legal entities compared with other U.S.
bank SIFIs and that they operate in various countries, suggesting that
they may be more complex.
* Figure 3 shows that 6 of 7 large bank SIFIs had more than 2,300
legal entities, with two of them having almost 7,000 and 11,000. The
median number of legal entities for large SIFIs was 4,160, while the
median for the remaining 27 bank SIFIs was 109. Within this group, the
maximum number of legal entities for a bank holding company was 787,
but 21 of the 27 bank holding companies had less than 200 legal
entities.
Figure 3: Total Legal Entities of U.S. Bank SIFIs, as of October 23,
2012:
[Refer to PDF for image: horizontal bar graph]
Median for large SIFIs: 4,160;
Median for other SIFIs: 109.
Asset ranking: 1;
Number of legal entities: 4,160.
Asset ranking: 2;
Number of legal entities: 2,722.
Asset ranking: 3;
Number of legal entities: 2,308.
Asset ranking: 4;
Number of legal entities: 4,667.
Asset ranking: 5;
Number of legal entities: 10,983.
Asset ranking: 6;
Number of legal entities: 232.
Asset ranking: 7;
Number of legal entities: 6,975.
Asset ranking: 8;
Number of legal entities: 109.
Asset ranking: 9;
Number of legal entities: 423.
Asset ranking: 10;
Number of legal entities: 165.
Asset ranking: 11;
Number of legal entities: 610.
Asset ranking: 12;
Number of legal entities: 145.
Asset ranking: 13;
Number of legal entities: 82.
Asset ranking: 14;
Number of legal entities: 319.
Asset ranking: 15;
Number of legal entities: 263.
Asset ranking: 16;
Number of legal entities: 145.
Asset ranking: 17;
Number of legal entities: 87.
Asset ranking: 18;
Number of legal entities: 464.
Asset ranking: 19;
Number of legal entities: 58.
Asset ranking: 20;
Number of legal entities: 41.
Asset ranking: 21;
Number of legal entities: 787.
Asset ranking: 22;
Number of legal entities: 56.
Asset ranking: 23;
Number of legal entities: 139.
Asset ranking: 24;
Number of legal entities: 152.
Asset ranking: 25;
Number of legal entities: 196.
Asset ranking: 26;
Number of legal entities: 64.
Asset ranking: 27;
Number of legal entities: 90.
Asset ranking: 28;
Number of legal entities: 25.
Asset ranking: 29;
Number of legal entities: 31.
Asset ranking: 30;
Number of legal entities: 49.
Asset ranking: 31;
Number of legal entities: 111.
Asset ranking: 32;
Number of legal entities: 76.
Asset ranking: 33;
Number of legal entities: 106.
Asset ranking: 34;
Number of legal entities: 72.
Source: GAO analysis of Federal REserve Board data from the National
Information Center.
Note: Bank SIFIs are ranked by assets as of the second quarter of
2012, with 1 being the bank SIFI with the most assets and 34 being the
bank SIFI with the least assets.
[End of figure]
* Table 7 shows that almost all large U.S. bank SIFIs have a high
number or percentage of legal entities located outside of the United
States and that these legal entities operate in numerous different
countries. For example, bank SIFI 3, 5, and 7 all have thousands of
foreign legal entities operating in 81, 60, and 55 different
countries, respectively.
Table 7: Foreign Legal Entities of Large U.S. Bank SIFIs, as of
October 22, 2012:
Bank SIFI ranking: Bank SIFI 1;
Total number of legal entities: 4,144;
Number and percent of foreign legal entities: 777 (19%);
Number of countries where foreign entities are located: 51.
Bank SIFI ranking: Bank SIFI 2;
Total number of legal entities: 2,559;
Number and percent of foreign legal entities: 656 (26%);
Number of countries where foreign entities are located: 47.
Bank SIFI ranking: Bank SIFI 3;
Total number of legal entities: 2,308;
Number and percent of foreign legal entities: 1,239 (54%);
Number of countries where foreign entities are located: 81.
Bank SIFI ranking: Bank SIFI 4;
Total number of legal entities: 4,666;
Number and percent of foreign legal entities: 227 (5%);
Number of countries where foreign entities are located: 27.
Bank SIFI ranking: Bank SIFI 5;
Total number of legal entities: 10,974;
Number and percent of foreign legal entities: 5,697 (52%);
Number of countries where foreign entities are located: 60.
Bank SIFI ranking: Bank SIFI 6;
Total number of legal entities: 232;
Number and percent of foreign legal entities: 188 (81%);
Number of countries where foreign entities are located: 37.
Bank SIFI ranking: Bank SIFI 7;
Total number of legal entities: 7,039;
Number and percent of foreign legal entities: 3,927 (56%);
Number of countries where foreign entities are located: 55.
Source: GAO analysis of National Information Center data maintained by
the Federal Reserve.
Note: Large bank SIFIs are those with assets of $500 billion or more.
Bank SIFIs are ranked by assets as of the second quarter of 2012, with
1 being the bank SIFI with the most assets.
[End of table]
Unlike size, leverage, or liquidity measures, interconnectedness
measures are a relatively new concept, and academics are developing
ways to capture the various types of interconnectedness that may lead
to financial instability.[Footnote 69] For this report, we did not
develop indicators for interconnectedness but expect to do so in the
future. The Financial Stability Board (FSB), with the help of the
Basel Committee, has designated eight U.S bank holding companies,
including the largest seven bank SIFIs, as globally systemically
important banks (G-SIB), largely based on its assessment of the
companies’ interconnectedness and complexity.[Footnote 70] The Basel
Committee’s G-SIB designation process uses a variety of quantitative
indicators to rate each global bank holding company on its size,
interconnectedness, global cross-jurisdictional activity, complexity,
and availability of substitutes or financial institution
infrastructures for the services produced. As we work to develop
interconnectedness indicators, we will monitor the status of the G-SIB
designation process.[Footnote 71]
SIFI Leverage:
Our leverage indicators show that U.S. bank SIFIs have decreased their
leverage between 2010 and the second quarter of 2012, which may
suggest that the average U.S. bank SIFI, all else equal, has become
more resilient to shocks since 2010. Leverage generally refers to the
use of debt, instead of equity, to fund an asset, but can be defined
more broadly as the ratio between some measure of risk exposure and
capital that can be used to absorb unexpected losses from the
exposure. According to federal regulators, the recent financial crisis
exposed significant weaknesses in the regulatory capital requirements
for large banking companies. Specifically, the amount and quality of
capital held by many large, complex banking companies during the
crisis proved inadequate to cover the companies’ risks.
To address weaknesses in capital requirements, federal banking
regulators are implementing reforms under the Dodd-Frank Act and the
Basel Committee that require better capitalization; that is, less
leverage and higher quality capital.[Footnote 72] These reforms may
cause SIFIs to reduce their leverage.[Footnote 73] For example, as
part of its proposed enhanced prudential standards for bank holding
companies with $50 billion or more in total consolidated assets and
nonbank financial companies designated by FSOC, the Federal Reserve
would require all of these companies to submit annual capital plans,
conduct stress tests, and hold sufficient capital to better ensure
that the firms can survive during periods of stress.[Footnote 74] In
addition, the Federal Reserve plans to propose a risk-based capital
surcharge on at least some SIFIs that is based on the capital
surcharge for G-SIBs.[Footnote 75]
Although there are many ways to measure leverage, we use two measures:
(1) tangible common equity as a percent of total assets, and (2)
tangible common equity as a percent of risk-weighted assets.76 The two
indicators differ, in part because total risk-weighted assets reflect
some of an institution’s off-balance sheet activity but total assets
do not. We focus on tangible common equity, because it most closely
approximates the amount of capital available to absorb losses in asset
values in the short term. A limitation of both indicators is that they
may not fully reflect an institution’s exposure to risk. Total assets
do not reflect an institution’s risk exposure from off-balance sheet
activities and generally treat all assets as equally risky. The
calculation of risk-weighted assets is designed to reflect differences
in risk, but the weights assigned to the assets may not fully reflect
the risk exposure associated with those assets, for example, because
assets in broad categories of loans all receive the same risk weight.
Both indicators show that U.S. bank SIFIs are less leveraged:
* Figure 4 shows that SIFIs’ median tangible common equity as a
percent of total assets has increased from the third quarter of 2010
to the second quarter of 2012, continuing an upward trend since the
beginning of 2009.
Figure 4: Median Tangible Common Equity as a Percent of Total Assets
for U.S. Bank Holding Companies by Size, from First Quarter of 2006
through Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
Non-SIFI banks: More than or equal to $50 million - less than $50
billion in assets;
Other bank SIFIs: More than or equal to $50 billion - less than $500
billion in assets;
Large bank SIFIs: More than or equal to $500 billion in assets.
2006, Q1;
Non-SIFIs: 7.3%;
Other bank SIFIs: 5.2%;
Large bank SIFIs: 4.4%.
2006, Q2;
Non-SIFIs: 7.2%;
Other bank SIFIs: 5.1%2;
Large bank SIFIs: 4.3%.
2006, Q3;
Non-SIFIs: 7.4%;
Other bank SIFIs: 5.7%;
Large bank SIFIs: 4.6%.
2006, Q4;
Non-SIFIs: 7.4%;
Other bank SIFIs: 5.5%;
Large bank SIFIs: 4.2%.
2007, Q1;
Non-SIFIs: 7.4%;
Other bank SIFIs: 5.5%;
Large bank SIFIs: 4.0%.
2007, Q2;
Non-SIFIs: 7.2%;
Other bank SIFIs: 5.2%;
Large bank SIFIs: 4.0%.
2007, Q3;
Non-SIFIs: 7.3%;
Other bank SIFIs: 5.4%;
Large bank SIFIs: 4.0%.
2007, Q4;
Non-SIFIs: 7.4%;
Other bank SIFIs: 5.1%;
Large bank SIFIs: 3.7%.
2008, Q1;
Non-SIFIs: 7.3%;
Other bank SIFIs: 5.0%;
Large bank SIFIs: 3.3%.
2008, Q2;
Non-SIFIs: 7.0%;
Other bank SIFIs: 5.1%;
Large bank SIFIs: 3.2%.
2008, Q3;
Non-SIFIs: 6.9%;
Other bank SIFIs: 5.1%;
Large bank SIFIs: 2.6%.
2008, Q4;
Non-SIFIs: 6.7%;
Other bank SIFIs: 4.4%;
Large bank SIFIs: 2.7%.
2009, Q1;
Non-SIFIs: 6.7%;
Other bank SIFIs: 4.8%;
Large bank SIFIs: 3.5%.
2009, Q2;
Non-SIFIs: 6.7%;
Other bank SIFIs: 5.7%;
Large bank SIFIs: 3.8%.
2009, Q3;
Non-SIFIs: 6.8%;
Other bank SIFIs: 6.0%;
Large bank SIFIs: 4.9%.
2009, Q4;
Non-SIFIs: 6.7%;
Other bank SIFIs: 5.9%;
Large bank SIFIs: 5.1%.
2010, Q1;
Non-SIFIs: 7.0%;
Other bank SIFIs: 6.0%;
Large bank SIFIs: 4.9%.
2010, Q2;
Non-SIFIs: 7.2%;
Other bank SIFIs: 6.7%;
Large bank SIFIs: 5.5%.
2010, Q3;
Non-SIFIs: 7.4%;
Other bank SIFIs: 6.8%;
Large bank SIFIs: 6.3%.
2010, Q4;
Non-SIFIs: 7.3%;
Other bank SIFIs: 7.1%;
Large bank SIFIs: 5.6%.
2011, Q1;
Non-SIFIs: 7.5%;
Other bank SIFIs: 7.1%;
Large bank SIFIs: 5.8%.
2011, Q2;
Non-SIFIs: 7.9%;
Other bank SIFIs: 7.2%;
Large bank SIFIs: 5.7%.
2011, Q3;
Non-SIFIs: 8.0%;
Other bank SIFIs: 7.5%;
Large bank SIFIs: 6.2%.
2011, Q4;
Non-SIFIs: 8.0%;
Other bank SIFIs: 7.5%;
Large bank SIFIs: 6.6%.
2012, Q1;
Non-SIFIs: 8.1%;
Other bank SIFIs: 7.7%;
Large bank SIFIs: 6.4%.
2012, Q2;
Non-SIFIs: 8.3%;
Other bank SIFIs: 8.0%;
Large bank SIFIs: 6.6%.
Source: GAO analysis of SNL Financial data.
Note: To calculate median tangible common equity as a percent of
assets, we calculated this percentage for each bank holding company,
and then reported the median for large bank SIFIs, the median for
other bank SIFIs, and the median for non-SIFI banks.
[End of figure]
* Figure 5 shows that SIFIs’ median tangible common equity as a
percent of risk-weighted assets, which include off-balance sheet
activity, has also increased from the third quarter of 2010 to the
second quarter of 2012, continuing an upward trend since the middle of
2009.
Figure 5: Median Tangible Common Equity as a Percent of Risk-Weighted
Assets for U.S. Bank Holding Companies by Size, from First Quarter of
2006 through Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
Non-SIFI banks: More than or equal to $50 million - less than $50
billion in assets;
Other bank SIFIs: More than or equal to $50 billion - less than $500
billion in assets;
Large bank SIFIs: More than or equal to $500 billion in assets.
2006, Q1;
Non-SIFIs: 9.4%;
Other bank SIFIs: 7.2%;
Large bank SIFIs: 6.2%.
2006, Q2;
Non-SIFIs: 9.2%;
Other bank SIFIs: 7.0%;
Large bank SIFIs: 6.7%.
2006, Q3;
Non-SIFIs: 9.5%;
Other bank SIFIs: 7.3%;
Large bank SIFIs: 6.7%.
2006, Q4;
Non-SIFIs: 9.4%;
Other bank SIFIs: 7.2%;
Large bank SIFIs: 6.8%.
2007, Q1;
Non-SIFIs: 9.4%;
Other bank SIFIs: 6.9%;
Large bank SIFIs: 6.1%.
2007, Q2;
Non-SIFIs: 9.2%;
Other bank SIFIs: 6.3%;
Large bank SIFIs: 6.4%.
2007, Q3;
Non-SIFIs: 9.3%;
Other bank SIFIs: 6.6%;
Large bank SIFIs: 5.8%.
2007, Q4;
Non-SIFIs: 9.3%;
Other bank SIFIs: 6.3%;
Large bank SIFIs: 5.0%.
2008, Q1;
Non-SIFIs: 9.3%;
Other bank SIFIs: 6.2%;
Large bank SIFIs: 4.4%.
2008, Q2;
Non-SIFIs: 8.9%;
Other bank SIFIs: 6.2%;
Large bank SIFIs: 4.3%.
2008, Q3;
Non-SIFIs: 8.8%;
Other bank SIFIs: 6.4%;
Large bank SIFIs: 4.9%.
2008, Q4;
Non-SIFIs: 8.6%;
Other bank SIFIs: 6.1%;
Large bank SIFIs: 3.7%.
2009, Q1;
Non-SIFIs: 8.6%;
Other bank SIFIs: 5.7%;
Large bank SIFIs: 5.3%.
2009, Q2;
Non-SIFIs: 8.6%;
Other bank SIFIs: 7.1%;
Large bank SIFIs: 6.2%.
2009, Q3;
Non-SIFIs: 9.1%;
Other bank SIFIs: 7.6%;
Large bank SIFIs: 8.2%.
2010, Q4;
Non-SIFIs: 9.0%;
Other bank SIFIs: 8.0%;
Large bank SIFIs: 8.1%.
2010, Q1;
Non-SIFIs: 9.6%;
Other bank SIFIs: 8.3%;
Large bank SIFIs: 8.5%.
2010, Q2;
Non-SIFIs: 10%;
Other bank SIFIs: 8.7%;
Large bank SIFIs: 9.3%.
2010, Q3;
Non-SIFIs: 10.4%;
Other bank SIFIs: 9.4%;
Large bank SIFIs: 10.8%.
2010, Q4;
Non-SIFIs: 10.3%;
Other bank SIFIs: 9.5%;
Large bank SIFIs: 9.8%.
2011, Q1;
Non-SIFIs: 10.8%;
Other bank SIFIs: 9.6%;
Large bank SIFIs: 10.0%.
2011, Q2;
Non-SIFIs: 11.3%;
Other bank SIFIs: 9.9%;
Large bank SIFIs: 10.2%.
2011, Q3;
Non-SIFIs: 11.7%;
Other bank SIFIs: 10.2%;
Large bank SIFIs: 11.0%.
2011, Q4;
Non-SIFIs: 11.7%;
Other bank SIFIs: 10.0%;
Large bank SIFIs: 11.0%.
2012, Q1;
Non-SIFIs: 12.0%;
Other bank SIFIs: 10.8%;
Large bank SIFIs: 11.1%.
2012, Q2;
Non-SIFIs: 12.1%;
Other bank SIFIs: 10.3%;
Large bank SIFIs: 11.7%.
Source: GAO analysis of SNL Financial data.
Note: To calculate median tangible common equity as a percent of risk-
weighted assets, we calculated this percentage for each bank holding
company, and then reported the median for large bank SIFIs, the median
for other bank SIFIs, and the median for non-SIFI banks.
[End of figure]
SIFI Liquidity:
Our indicators suggest that U.S. bank SIFIs have improved their
liquidity, which may indicate that they, on average, have become more
resilient to shocks since 2010. Liquidity represents the ability of a
financial institution to fund its assets and meet its obligations as
they become due. Liquidity risk is the risk of not being able to
obtain funds at a reasonable price within a reasonable time period to
meet obligations as they become due. According to Federal Reserve
staff, the 2007-2009 financial crisis illustrated that under strained
market conditions, sources of liquidity can quickly disappear, and
firms may be unable to meet their obligations, potentially leading to
insolvency. As with capital and leverage requirements, the Dodd-Frank
Act and Basel III contain reforms that address liquidity risk and may
result in improvements in the liquidity of SIFIs.[Footnote 77] For
example, as part of the enhanced prudential standards for bank holding
companies with $50 billion or more in total consolidated assets and
nonbank financial companies designated by FSOC for Federal Reserve
supervision, the Federal Reserve has proposed imposing liquidity risk
management standards that require company-run liquidity stress tests
and a contingency funding plan.[Footnote 78] The proposed regulations
also require a liquidity buffer to meet projected cash outflows. In
addition, the Federal Reserve plans to propose liquidity requirements
on at least some SIFIs based on Basel III’s liquidity requirements, as
implemented in the United States.[Footnote 79]
We developed two indicators to analyze changes in SIFI liquidity: (1)
short-term liabilities as a percent of total liabilities and (2)
liquid assets as a percent of short-term liabilities.[Footnote 80]
Short-term liabilities are balance sheet obligations due within 1
year; an institution’s short-term liabilities as a percent of total
liabilities are a measure of its need for liquidity. Liquid assets can
easily be sold without affecting their price and, thus, can be easily
converted to cash to cover debts that come due. Accordingly, liquid
assets as a percent of an institution’s short-term liabilities are a
measure of access to liquidity. For example, if this percentage is
under 100 percent, the institution does not have sufficient access to
liquidity and is unlikely to have enough liquid assets to cover its
short-term debt. A limitation of both of these indicators is that they
do not include off-balance sheet liabilities, such as callable
derivatives or potential derivatives-related obligations. The second
indicator also does not include off-balance sheet liquid assets, such
as short-term income from derivative contracts.[Footnote 81]
Both liquidity indicators suggest that U.S. bank SIFIs have improved
their liquidity since the third quarter of 2010. The figures also show
that large bank SIFIs held relatively more short-term liabilities but
also relatively more liquid assets to cover such liabilities than
other bank SIFIs.
* Figure 6 shows that median short-term liabilities as a percent of
total liabilities declined from the third quarter of 2010 through the
second quarter of 2012 for both large and other SIFIs.
Figure 6: Median Short-Term Liabilities as a Percent of Total
Liabilities for U.S. Bank Holding Companies by Size, from First
Quarter of 2006 through Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
Non-SIFI banks: More than or equal to $50 million - less than $50
billion in assets;
Other bank SIFIs: More than or equal to $50 billion - less than $500
billion in assets;
Large bank SIFIs: More than or equal to $500 billion in assets.
2006, Q1;
Non-SIFIs: 27.0%;
Other bank SIFIs: 37.2%;
Large bank SIFIs: 53.3%.
2006, Q2;
Non-SIFIs: 27.5%;
Other bank SIFIs: 41.5%;
Large bank SIFIs: 53.4%.
2006, Q3;
Non-SIFIs: 28.3%;
Other bank SIFIs: 41.9%;
Large bank SIFIs: 54.3%.
2006, Q4;
Non-SIFIs: 27.7%;
Other bank SIFIs: 39.3%;
Large bank SIFIs: 52.8%.
2007, Q1;
Non-SIFIs: 26.6%;
Other bank SIFIs: 37.4%;
Large bank SIFIs: 56.8%.
2007, Q2;
Non-SIFIs: 26.4%;
Other bank SIFIs: 38.9%;
Large bank SIFIs: 54.5%.
2007, Q3;
Non-SIFIs: 26.8%;
Other bank SIFIs: 36.8%;
Large bank SIFIs: 57.5%.
2007, Q4;
Non-SIFIs: 27.6%;
Other bank SIFIs: 37.8%;
Large bank SIFIs: 54.3%.
2008, Q1;
Non-SIFIs: 28.2%;
Other bank SIFIs: 38.1%;
Large bank SIFIs: 52.7%.
2008, Q2;
Non-SIFIs: 29.1%;
Other bank SIFIs: 38.4%;
Large bank SIFIs: 53.1%.
2008, Q3;
Non-SIFIs: 28.6%;
Other bank SIFIs: 36.8%;
Large bank SIFIs: 53.4%.
2008, Q4;
Non-SIFIs: 28.8%;
Other bank SIFIs: 34.0%;
Large bank SIFIs: 52.0%.
2009, Q1;
Non-SIFIs: 28.0%;
Other bank SIFIs: 33.7%;
Large bank SIFIs: 53.3%.
2009, Q2;
Non-SIFIs: 27.6%;
Other bank SIFIs: 32.4%;
Large bank SIFIs: 56.1%.
2009, Q3;
Non-SIFIs: 27.6%;
Other bank SIFIs: 27.8%;
Large bank SIFIs: 56.0%.
2009, Q4;
Non-SIFIs: 27.3%;
Other bank SIFIs: 26.7%;
Large bank SIFIs: 55.5%.
2010, Q1;
Non-SIFIs: 26.5%;
Other bank SIFIs: 27.6%;
Large bank SIFIs: 57.2%.
2010, Q2;
Non-SIFIs: 25.7%;
Other bank SIFIs: 25.2%;
Large bank SIFIs: 54.1%.
2010, Q3;
Non-SIFIs: 25.3%;
Other bank SIFIs: 25.4%;
Large bank SIFIs: 55.1%.
2010, Q4;
Non-SIFIs: 24.3%;
Other bank SIFIs: 24.5%;
Large bank SIFIs: 52.7%.
2011, Q1;
Non-SIFIs: 23.8%;
Other bank SIFIs: 24.1%;
Large bank SIFIs: 53.7%.
2011, Q2;
Non-SIFIs: 23.4%;
Other bank SIFIs: 23.1%;
Large bank SIFIs: 52.0%.
2011, Q3;
Non-SIFIs: 22.8%;
Other bank SIFIs: 22.9%;
Large bank SIFIs: 48.4%.
2011, Q4;
Non-SIFIs: 21.8%;
Other bank SIFIs: 24.1%;
Large bank SIFIs: 46.1%.
2012, Q1;
Non-SIFIs: 21.1%;
Other bank SIFIs: 22.4%;
Large bank SIFIs: 47.1%.
2012, Q2;
Non-SIFIs: 20.8%;
Other bank SIFIs: 22.7%;
Large bank SIFIs: 46.4%.
Source: GAO analysis of SNL Financial data.
Note: To calculate median short-term liabilities as a percent of total
liabilities, we calculated this percentage for each bank holding
company, and then reported the median for large bank SIFIs, the median
for other bank SIFIs, and the median for non-SIFI banks.
[End of figure]
* Figure 7 shows that median short-term (or liquid) assets as a
percent of short-term liabilities increased for both large and other
SIFIs during the same period.
Figure 7: Median Liquid Assets as a Percent of Short-term Liabilities
for U.S. Bank Holding Companies by Size, from First Quarter of 2006
through Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
Non-SIFI banks: More than or equal to $50 million - less than $50
billion in assets;
Other bank SIFIs: More than or equal to $50 billion - less than $500
billion in assets;
Large bank SIFIs: More than or equal to $500 billion in assets.
2006, Q1;
Non-SIFIs: 51.5%;
Other bank SIFIs: 37.8%;
Large bank SIFIs: 79.6%.
2006, Q2;
Non-SIFIs: 44.8%;
Other bank SIFIs: 37.2%;
Large bank SIFIs: 78.7%.
2006, Q3;
Non-SIFIs: 43.9%;
Other bank SIFIs: 33.6%;
Large bank SIFIs: 69.3%.
2006, Q4;
Non-SIFIs: 48.5%;
Other bank SIFIs: 39.3%;
Large bank SIFIs: 70.8%.
2007, Q1;
Non-SIFIs: 49.5%;
Other bank SIFIs: 40.9%;
Large bank SIFIs: 81.6%.
2007, Q2;
Non-SIFIs: 46.4%;
Other bank SIFIs: 37.5%;
Large bank SIFIs: 73.6%.
2007, Q3;
Non-SIFIs: 42.6%;
Other bank SIFIs: 34.4%;
Large bank SIFIs: 64.3%.
2007, Q4;
Non-SIFIs: 40.1%;
Other bank SIFIs: 35.3%;
Large bank SIFIs: 68.2%.
2008, Q1;
Non-SIFIs: 39.2%;
Other bank SIFIs: 34.5%;
Large bank SIFIs: 69.5%.
2008, Q2;
Non-SIFIs: 35.1%;
Other bank SIFIs: 32.3%;
Large bank SIFIs: 70.4%.
2008, Q3;
Non-SIFIs: 33.5%;
Other bank SIFIs: 29.7%;
Large bank SIFIs: 83.7%.
2008, Q4;
Non-SIFIs: 36.0%;
Other bank SIFIs: 48.3%;
Large bank SIFIs: 74.5%.
2009, Q1;
Non-SIFIs: 43.7%;
Other bank SIFIs: 55.3%;
Large bank SIFIs: 88.2%.
2009, Q2;
Non-SIFIs: 45.5%;
Other bank SIFIs: 55.5%;
Large bank SIFIs: 96.9%.
2009, Q3;
Non-SIFIs: 50.0%;
Other bank SIFIs: 63.6%;
Large bank SIFIs: 96.2%.
2009, Q4;
Non-SIFIs: 53.7%;
Other bank SIFIs: 68.3%;
Large bank SIFIs: 98.8%.
2010, Q1;
Non-SIFIs: 59.7%;
Other bank SIFIs: 70.0%;
Large bank SIFIs: 96.3%.
2010, Q2;
Non-SIFIs: 62.2%;
Other bank SIFIs: 70.9%;
Large bank SIFIs: 99.4%.
2010, Q3;
Non-SIFIs: 67.0%;
Other bank SIFIs: 79%;
Large bank SIFIs: 100.8%.
2010, Q4;
Non-SIFIs: 71.1%;
Other bank SIFIs: 76.7%;
Large bank SIFIs: 106.6%.
2011, Q1;
Non-SIFIs: 78.8%;
Other bank SIFIs: 86.2%;
Large bank SIFIs: 105.0%.
2011, Q2;
Non-SIFIs: 79.4%;
Other bank SIFIs: 93.2%;
Large bank SIFIs: 109.5%.
2011, Q3;
Non-SIFIs: 86.6%;
Other bank SIFIs: 99.5%;
Large bank SIFIs: 120.8%.
2011, Q4;
Non-SIFIs: 90.8%;
Other bank SIFIs: 99.6%;
Large bank SIFIs: 124.7%.
2012, Q1;
Non-SIFIs: 99.6%;
Other bank SIFIs: 94.9%;
Large bank SIFIs: 133.9%.
2012, Q2;
Non-SIFIs: 96.8%;
Other bank SIFIs: 102.6%;
Large bank SIFIs: 124.2%.
Source: GAO analysis of SNL Financial data.
Note: To calculate median liquid assets as a percent of short-term
liabilities, we calculated this percentage for each bank holding
company, and then reported the median for large bank SIFIs, the median
for other bank SIFIs, and the median for non-SIFI banks.
[End of figure]
New Requirements for Bank SIFIs Initially Appear to Have Affected
Minimally the Cost of SIFI-Provided Credit and Enhanced SIFIs’ Safety
and Soundness:
According to our regression analysis, the Dodd-Frank Act has been
associated with minimal increases in the cost of credit provided by
U.S. bank SIFIs and an increase in the safety and soundness of the
SIFIs.[Footnote 82] As we have noted, the Dodd-Frank Act requires the
Federal Reserve to impose a variety of regulatory reforms on SIFIs,
including enhanced risk-based capital, leverage, and liquidity
requirements. These reforms may affect not only the safety and
soundness of bank SIFIs but also the cost and availability of credit
provided by bank SIFIs. Although capital and leverage requirements may
help reduce the probability of a firm failing and promote financial
stability, they could cause firms to raise lending rates and also
limit firms’ ability to provide credit, especially during a crisis.
Similarly, while stricter liquidity requirements may help reduce the
probability of a firm failing and promote financial stability,
companies could respond to these requirements by increasing lending
spreads to offset lower yields on assets or longer maturities on
liabilities. To the extent that they increase the cost and reduce the
availability of credit, these reforms may lead to reduced output and
economic growth.[Footnote 83]
As mentioned earlier, the Dodd-Frank Act subjects some bank holding
companies to enhanced oversight and regulation but not other bank
holding companies. Specifically, the act requires the Federal Reserve
to impose a number of enhanced prudential standards on bank holding
companies with total consolidated assets of $50 billion or more. These
prudential standards must include enhanced risk-based capital and
leverage requirements, enhanced liquidity requirements, enhanced risk-
management and risk committee requirements, single-counterparty credit
limits, stress tests, and a debt-to-equity limit for bank holding
companies that FSOC has determined pose a grave threat to the
stability of the financial system if the imposition of such a limit is
necessary to mitigate the risk.[Footnote 84] The Federal Reserve
published proposed rules to implement these requirements on January 5,
2012.[Footnote 85] Under the proposed rules, bank holding companies
with $50 billion or more in total consolidated assets would be subject
to the enhanced prudential standards beginning on the first day of the
fifth quarter following the effective date of a final rule. On the
other hand, bank holding companies with less than $50 billion in total
consolidated assets are not subject to the Board’s enhanced prudential
standards. As a result, we can compare funding costs, capital
adequacy, asset quality, earnings, and liquidity for bank SIFIs and
non-SIFI bank holding companies before and after the implementation of
the enhanced prudential requirements. All else being equal, the
difference in the comparative differences is the inferred effect of
the Dodd-Frank Act on bank SIFIs. While many of the SIFI-related
rulemakings have yet to be implemented, our estimates are suggestive
of the initial effects of the Dodd-Frank Act on bank SIFIs and provide
a baseline against which to compare future results.[Footnote 86]
Our estimates suggest that the Dodd-Frank Act is associated with an
increase in U.S. bank SIFIs’ funding costs in the second quarter of
2012, but it is not associated with either an increase or decrease in
other quarters (table 8). From the third quarter of 2010 to the second
quarter of 2012, bank SIFIs’ funding cost ranged from about 0.02
percentage points lower to about 0.05 percentage points higher than it
otherwise would have been since the Dodd-Frank Act was enacted.
However, the estimates are not individually statistically significant
for quarters other than the second quarter of 2012. These estimates
suggest that the act’s new requirements for SIFIs have had little
effect on U.S. bank SIFIs’ funding costs, at least until recently. To
the extent that the cost of credit provided by bank SIFIs is a
function of their funding costs, the new requirements for SIFIs are
likely to have had little effect on the cost of credit to date.
Table 8: Estimated Changes in U.S. Bank SIFIs’ Funding Cost and
Measures of Safety and Soundness Associated with the Dodd-Frank Act,
from Third Quarter 2010 through Second Quarter 2012:
Cost of credit indicator:
Variable: Funding cost;
Measured as: Interest expense as a percent of interest-bearing
liabilities;
Range of statistically significant estimated changes (percentage
points): 0.05;
Quarters estimated changes are statistically significant: 2012 Q2.
Safety and soundness indicators:
Variable: Capital adequacy;
Measured as: Tangible common equity as a percent of total assets;
Range of statistically significant estimated changes (percentage
points): 1.16 to 1.66;
Quarters estimated changes are statistically significant: 2010 Q3-2012
Q2.
Variable: Capital adequacy;
Measured as: Tangible common equity as a percent of risk-weighted
assets;
Range of statistically significant estimated changes (percentage
points): 1.70 to 2.24;
Quarters estimated changes are statistically significant: 2010 Q3-2012
Q2.
Variable: Asset quality;
Measured as: Performing assets as a percent of total assets;
Range of statistically significant estimated changes (percentage
points): 1.04 to 1.32;
Quarters estimated changes are statistically significant: 2010 Q3-2012
Q2.
Variable: Earnings;
Measured as: Earnings as a percent of total assets;
Range of statistically significant estimated changes (percentage
points): 0.10 to 0.24;
Quarters estimated changes are statistically significant: 2010 Q3-2011
Q3.
Variable: Liquidity;
Measured as: Liquid assets as a percent of volatile liabilities;
Range of statistically significant estimated changes (percentage
points): No statistically significant estimated changes;
Quarters estimated changes are statistically significant: None.
Variable: Liquidity;
Measured as: Stable liabilities as a percent of total liabilities;
Range of statistically significant estimated changes (percentage
points): 2.82 to 5.67;
Quarters estimated changes are statistically significant: 2010 Q3-2012
Q2.
Source: GAO analysis of data from the Federal Reserve and SNL
Financial.
Notes: We analyzed data for bank holding companies from the first
quarter of 2006 through the second quarter of 2012. We estimated the
effects of the new SIFI requirements on bank SIFIs by regressing the
variables listed in the table on indicators for each bank holding
company, indicators for each quarter, indicators for whether a bank
holding company is a SIFI for each quarter from the third in 2010
through the second in 2012, and other variables controlling for size,
foreign exposure, securitization income, other nontraditional income,
and participation in the Troubled Asset Relief Program. Estimated
changes are the coefficients on the indicators for whether a bank
holding company is a SIFI in each quarter from the third in 2010
through the second in 2012. We used t-tests to assess whether the
coefficient on the SIFI indicator for a specific quarter was
significant at the 5 percent level. For more information on our
methodology, see appendix IV.
[End of table]
Table 8 also shows that the Dodd-Frank Act is associated with
improvements in most measures of U.S. bank SIFIs’ safety and
soundness. Bank SIFIs appear to be holding more capital than they
otherwise would have held in every quarter since the Dodd-Frank Act
was enacted. The quality of assets on the balance sheets of bank SIFIs
also seems to have improved since the Dodd-Frank Act was enacted. The
act is associated with higher earnings for bank SIFIs in the first
four quarters after the act’s enactment. It is also associated with
improved liquidity as measured by the extent to which a bank holding
company is using stable sources of funding. The only measure that has
not clearly improved since the act’s enactment was liquidity as
measured by the capacity of a bank holding company’s liquid assets to
cover its volatile liabilities. Thus, the Dodd-Frank Act appears to be
broadly associated with improvements in most indicators of safety and
soundness for U.S. bank SIFIs.
Our approach allows us to partially differentiate changes in funding
costs, capital adequacy, asset quality, earnings, and liquidity
associated with the Dodd-Frank Act from changes due to other factors.
However, several factors make isolating and measuring the impact of
the Dodd-Frank Act’s new requirements for SIFIs challenging. The
effects of the act cannot be differentiated from the effects of
simultaneous changes in economic conditions, such as the pace of the
recovery from the recent recession, or regulations, such as those
stemming from Basel III, or other changes, such as in credit ratings
that differentially may affect bank SIFIs and other bank holding
companies. In addition, many of the new requirements for SIFIs have
yet to be implemented. For example, the Federal Reserve plans to
impose a capital surcharge and liquidity ratios on at least some
SIFIs, but the exact form and scope of these requirements are not yet
known.[Footnote 87] Nevertheless, our estimates are suggestive of the
initial effects of the Dodd-Frank Act on bank SIFIs and provide a
baseline against which to compare future trends.
Analysis of Select Major Rules Identifies Some Initial Impacts, but
the Markets Have Not Yet Fully Adjusted to the Rules:
We analyzed the impact of four major rules that were issued separately
by the Federal Reserve and SEC pursuant to the Dodd-Frank Act and have
been final for around a year or more.[Footnote 88] In contrast to the
Dodd-Frank Act’s SIFI-related provisions and rules, these major rules
implement provisions that serve specific investor or consumer
protection purposes. These impact analyses are limited in scope and
preliminary in nature, in part, because of the limited time the rules
have been effective and limited data available on their impact. In
addition, as discussed below, financial and other firms subject to the
rules and other market participants still are reacting to the rules.
We reviewed the following four major rules: (1) the Federal Reserve’s
Regulation II (Debit Card Interchange Fees and Routing), (2) SEC’s
Issuer Review of Assets in Offerings of Asset-Backed Securities rule,
(3) SEC’s Disclosure for Asset-Backed Securities Required by Section
943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
rule, and (4) SEC’s Shareholder Approval of Executive Compensation and
Golden Parachute Compensation rules. We selected these rules because
they were major rules and some data were available about their
impact.[Footnote 89] Appendix V includes a more complete discussion of
our impact analysis on the Federal Reserve’s Regulation II.
The Federal Reserve’s Regulation II (Debit Interchange Fees and
Routing Rule):
Section 1075 of the Dodd-Frank Act amends the Electronic Fund Transfer
Act (EFTA) by adding a new section 920 on interchange transaction fees
and rules for payment card transactions. As required by EFTA section
920, the Federal Reserve’s Regulation II establishes standards for
assessing whether debit card interchange fees received by issuers are
reasonable and proportional to the costs incurred by issuers for
electronic debit transactions. The rule sets a cap on the maximum
permissible interchange fee that an issuer may receive for an
electronic debit transaction at $0.21 per transaction, plus 5 basis
points multiplied by the transaction’s value.[Footnote 90] An issuer
bank that complies with Regulation II’s fraud-prevention standards may
receive no more than an additional 1 cent per transaction.[Footnote
91] The fee cap became effective on October 1, 2011. However, as
required by EFTA section 920, the rule exempts from the fee cap
issuers that have, together with their affiliates, less than $10
billion in assets, and transactions made using debit cards issued
pursuant to government-administered payment programs or certain
reloadable prepaid cards.
Regulation II’s fee cap generally has reduced debit card interchange
fees.[Footnote 92] However, debit card issuers, payment card networks,
and merchants are continuing to react to the rule; thus, the rule’s
impact has not yet been fully realized. Large banks that issue debit
cards initially have experienced a decline in their debit interchange
fees as a result of the rule, but small banks generally have not.
[Footnote 93] Data published by the Federal Reserve show that 15 of 16
card networks provided a lower interchange fee, on average, to issuers
subject to the fee cap (covered issuers) after the rule took effect.
[Footnote 94] Specifically, the data show that the average interchange
fee received by covered issuers declined 52 percent, from $0.50 in the
first three quarters of 2011 to $0.24 in the fourth quarter. During
the same period, the interchange fee as a percentage of the average
transaction value for covered issuers declined from 1.29 percent to
0.60 percent. Our regression analysis also suggests that the fee cap
is associated with reduced interchange fee income for covered banks.
[Footnote 95] Our estimates suggest that interchange fees collected by
covered banks, as a percent of their assets, were about 0.007 to 0.008
percentage points lower than they otherwise would have been in the
absence of the fee cap. For a bank with assets of $50 billion, this
amounts to $3.5 million to $4 million in reduced interchange fee
income per quarter.[Footnote 96]
The reduction in debit interchange fees following the adoption of
Regulation II likely has resulted or will result in savings for
merchants. According to the Federal Reserve and industry experts, the
merchant acquirer market is competitive. Thus, the decrease in
interchange fees likely has translated or will translate into lower
merchant acquirer fees.[Footnote 97] However, merchants that have a
high volume of small value transactions may be worse off after the
adoption of the rule, because their debit card interchange fees might
have increased due to the fee cap.[Footnote 98]
In addition to the fee cap, Regulation II prohibits issuers and card
networks from restricting the number of networks over which electronic
debit transactions may be processed to less than two unaffiliated
networks.[Footnote 99] This prohibition became effective on April 1,
2012. The rule further prohibits issuers and networks from inhibiting
a merchant from directing the routing of an electronic debit
transaction over any network allowed by the issuer.[Footnote 100] This
prohibition became effective October 1, 2011.
Regulation II’s prohibitions may have a limited impact on increasing
competition and, in turn, lowering interchange fees, because issuers
largely control which networks may process their debit card
transactions. Merchants likely continue to have only one network
routing option for transactions completed by signature.[Footnote 101]
Additionally, issuers can comply by having an unaffiliated signature
network and personal identification number (PIN) network, which means
that there may only be one network routing choice once the customer
decides to use her signature or her PIN. Therefore, even though
Regulation II provides merchants with the authority to choose the
network over which to route debit card transactions, merchants may not
have a choice about which network to route a debit card transaction.
Going forward, issuers may be able to act strategically to limit
competition over debit card interchange fees through their control
over which networks may process their debit card transactions.
In response to Regulation II, VISA is undertaking strategies intended
to attract merchant routing. VISA recently imposed a new monthly fixed
acquirer fee that merchants must pay to accept VISA debit and credit
cards. VISA also plans to reduce merchants’ variable fees so that
merchants’ total fees associated with VISA transactions likely would
be lower after the new fee structure’s implementation.[Footnote 102]
In addition, according to VISA representatives, VISA’s signature
network also is able to process PIN transactions, in essence
automatically offering an additional PIN routing choice to merchants
for cards that carry VISA signature.[Footnote 103] For example, in the
past, a debit card that carried the VISA signature and two other PIN
networks usually would process a PIN transaction through one of the
PIN networks. Now, the VISA check card signature network can continue
to be the only option for routing signature debit transactions on that
card but also become a third option for routing PIN debit
transactions. The extent to which such strategies may lower debit card
interchange fees is unknown.
SEC’s Rules on Asset-Backed Securities Disclosures and Reviews:
Section 945 of the Dodd-Frank Act requires SEC to issue a rule
relating to the registration statement required to be filed by issuers
of asset-backed securities (ABS). To implement section 945, SEC
adopted a new rule under the Securities Act of 1933 and amending
Regulation AB.[Footnote 104] The rule requires an issuer of registered
offerings of ABS to perform a review of the assets underlying the
securities that “must be designed and effected to provide reasonable
assurance that the disclosure in the prospectus regarding the assets
is accurate in all material respects.”[Footnote 105] The rule requires
disclosure regarding: “the nature of the review of assets conducted by
an ABS issuer;” “the findings and conclusions of a review of assets
conducted by an ABS issuer or third party;” “disclosure regarding
assets in the pool that do not meet the underwriting standards;” and “
disclosure regarding which entity determined that the assets should be
included in the pool ....”[Footnote 106] This rule became effective on
March 28, 2011.
Section 943 of the Dodd-Frank Act requires SEC to prescribe
regulations on the use of representations and warranties in the market
for ABS. The new rules promulgated under section 943 require ABS
securitizers to disclose fulfilled and unfulfilled repurchase
requests.[Footnote 107] Specifically, ABS securitizers must disclose
demand, repurchase, and replacement history for an initial 3-year look
back period ending December 31, 2011, and going forward on a quarterly
basis. Further, the rules conform disclosure requirements for
prospectuses and ongoing reports for ABS sold in registered
transactions. The rule also requires nationally recognized statistical
rating organizations to disclose in any report accompanying a credit
rating for an ABS transaction, the representations, warranties, and
enforcement mechanisms available to investors and how they differ from
the representations, warranties and enforcement mechanisms in
issuances of similar securities. This rule became effective on March
28, 2011.
The two SEC ABS rules may increase issuer securitization costs but
also investor demand by improving investor confidence in the market
for ABS. The effect of the rules on the revitalization of the ABS
markets is unclear. Isolating and estimating the effects of the SEC
rules on the ABS market is challenging, but data on ABS issuances are
available. However, factors other than the SEC rules likely impact ABS
issuance trends much more significantly. For example, the ABS markets
compete with other capital markets for investor dollars, so yields or
potential returns to investments in competing markets may be an
important determinant of ABS activity. Additionally, ABS are backed by
residential mortgage, commercial mortgage, equipment, student, auto,
credit card, and other loans, which means that the health of those
underlying markets also may determine the extent to which financial
institutions may be able and willing to securitize the loans and
investors may be willing to invest in ABS.
Since 2010, ABS issuances of agency mortgage-related assets declined
slightly but appear to be stabilizing, while total issuances for other
types of ABS continue to be at historically low levels. Figure 8 shows
that ABS issuances in total historically have been dominated by agency
mortgage-related ABS. At the height of market issuances in 2003,
agency mortgage-related ABS made up about 76 percent (or $3.4
trillion) of the almost $4.5 trillion dollars in total issuances, and
between 2008 and 2011, they comprised about 91 percent of annual ABS
issuances.[Footnote 108] Agency mortgage-related ABS issuances
declined to 2004 levels in 2011, but the data for the first two
quarters of 2012 indicate that this recent downward trend may be
stabilizing.
Figure 8: Annual and Quarterly U.S. ABS Issuance, from 2000 through
Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
2012 Q2 dollars:
Year: 2000;
Agency mortgage-related: $756 billion;
Total excluding agency mortgage-related: $496 billion;
Total: $1.253 trillion.
Year: 2001;
Agency mortgage-related: $1.877 trillion;
Total excluding agency mortgage-related: $684 billion;
Total: $2.561 trillion.
Year: 2002;
Agency mortgage-related: $2.551 trillion;
Total excluding agency mortgage-related: $838 billion;
Total: $3.389 trillion.
Year: 2003;
Agency mortgage-related: $3.370 trillion;
Total excluding agency mortgage-related: $1.080 trillion;
Total: $4.450 trillion.
Year: 2004;
Agency mortgage-related: $1.656 trillion;
Total excluding agency mortgage-related: $1.407 trillion;
Total: $3.063 trillion.
Year: 2005;
Agency mortgage-related: $1.551 trillion;
Total excluding agency mortgage-related: $1.899 trillion;
Total: $3.449 trillion.
Year: 2006;
Agency mortgage-related: $1.381 trillion;
Total excluding agency mortgage-related: $1.854 trillion;
Total: $3.234 trillion.
Year: 2007;
Agency mortgage-related: $1.587 trillion;
Total excluding agency mortgage-related: $1.379 trillion;
Total: $2.966 trillion.
Year: 2008;
Agency mortgage-related: $1.448 trillion;
Total excluding agency mortgage-related: $187 billion;
Total: $1.635 trillion.
Year: 2009;
Agency mortgage-related: $2.125 trillion;
Total excluding agency mortgage-related: $178 billion;
Total: $2.302 trillion.
Year: 2010;
Agency mortgage-related: $2.012 trillion;
Total excluding agency mortgage-related: $147 billion;
Total: $2.159 trillion.
Year: 2011;
Agency mortgage-related: $1.647 trillion;
Total excluding agency mortgage-related: $164 billion;
Total: $1.811 trillion.
Quarterly data (2011 Q1-2012 Q2):
2011, Q1;
Agency mortgage-related: $468.4 billion;
Total excluding agency mortgage-related: $40.0 billion;
Total: $508.4 billion.
2011, Q2;
Agency mortgage-related: $368.6 billion;
Total excluding agency mortgage-related: $49.4 billion;
Total: $418.0 billion.
2011, Q3;
Agency mortgage-related: $353.8 billion;
Total excluding agency mortgage-related: $38.2 billion;
Total: $392.1 billion.
2011, Q4;
Agency mortgage-related: $456.7 billion;
Total excluding agency mortgage-related: $36.7 billion;
Total: $493.4 billion.
2012, Q1;
Agency mortgage-related: $480.8 billion;
Total excluding agency mortgage-related: $53.8 billion;
Total: $534.6 billion.
2012, Q2;
Agency mortgage-related: $458.8 billion;
Total excluding agency mortgage-related: $66.8 billion;
Total: $525.6 billion.
Source: Securities Industry and Financial Markets Association.
Note: Dollar amounts are adjusted for inflation and are expressed in
billions of 2012 Q2 dollars.
[End of figure]
Figure 9 shows that issuances of other U.S. ABS have not rebounded
from the sharp declines experienced after 2006.[Footnote 109] From
2006 to 2008, annual issuances of other U.S. ABS (i.e. total U.S. ABS
excluding agency mortgage-related ABS) fell by approximately 90
percent from over $1.8 trillion to less than $187 billion, due
primarily to 59 and 32 percent drops in non-agency mortgage-related
and home equity ABS issuances, respectively.[Footnote 110] Between
2008 and 2010, issuances of other ABS continued to decline slightly to
just over $147 billion. As shown in figure 9’s insert, other ABS
issuances have experienced modest increases since 2010, primarily
because of the growth in credit card, auto, and student loans ABS.
Figure 9: Annual and Quarterly U.S. ABS Issuance Excluding Agency
Mortgage-Related ABS, from 2000 through Second Quarter of 2012:
[Refer to PDF for image: multiple line graph]
2012 Q2 dollars:
Year: 2000;
Auto: $92 billion;
Credit Cards: $74 billion;
Home Equity: $98 billion;
Student loans: $24 billion;
Nonagency mortgage-related: $132 billion;
Total: $496 billion.
Year: 2001;
Auto: $106 billion;
Credit Cards: $87 billion;
Home Equity: $142 billion;
Student loans: $19 billion;
Nonagency mortgage-related: $270 billion;
Total: $684 billion.
Year: 2002;
Auto: $118 billion;
Credit Cards: $88 billion;
Home Equity: $188 billion;
Student loans: $35 billion;
Nonagency mortgage-related: $371 billion;
Total: $838 billion.
Year: 2003;
Auto: $101 billion;
Credit Cards: $82 billion;
Home Equity: $280 billion;
Student loans: $53 billion;
Nonagency mortgage-related: $516 billion;
Total: $1.080 trillion.
Year: 2004;
Auto: $94 billion;
Credit Cards: $64 billion;
Home Equity: $505 billion;
Student loans: $57 billion;
Nonagency mortgage-related: $632 billion;
Total: $1.407 trillion.
Year: 2005;
Auto: $122 billion;
Credit Cards: $78 billion;
Home Equity: $530 billion;
Student loans: $73 billion;
Nonagency mortgage-related: $1.032 trillion;
Total: $1.899 trillion.
Year: 2006;
Auto: $101 billion;
Credit Cards: $75 billion;
Home Equity: $539 billion;
Student loans: $75 billion;
Nonagency mortgage-related: $1.013 trillion;
Total: $1.854 trillion.
Year: 2007;
Auto: $85 billion;
Credit Cards: $108 billion;
Home Equity: $235 billion;
Student loans: $66 billion;
Nonagency mortgage-related: $829 billion;
Total: $1.379 trillion.
Year: 2008;
Auto: $38 billion;
Credit Cards: $63 billion;
Home Equity: $4 billion;
Student loans: $30 billion;
Nonagency mortgage-related: $39 billion;
Total: $187 billion.
Year: 2009;
Auto: $66 billion;
Credit Cards: $48 billion;
Home Equity: $2 billion;
Student loans: $23 billion;
Nonagency mortgage-related: $19 billion;
Total: $178 billion.
Year: 2010;
Auto: $60 billion;
Credit Cards: $8 billion;
Home Equity: $4 billion;
Student loans: $18 billion;
Nonagency mortgage-related: $36 billion;
Total: $147 billion.
Year: 2011;
Auto: $69 billion;
Credit Cards: $16 billion;
Home Equity: $2 billion;
Student loans: $14 billion;
Nonagency mortgage-related: $38 billion;
Total: $164 billion.
Quarterly data (2011 Q1-2012 Q2):
2011, Q1;
Auto: $17.409 billion;
Credit Cards: $3.812 billion;
Home Equity: $0.461 billion;
Student loans: $3.649 billion;
Nonagency mortgage-related: $9.145 billion;
Total: $39.983 billion.
2011, Q2;
Auto: $19.652 billion;
Credit Cards: $3.246 billion;
Home Equity: $1.127 billion;
Student loans: $6.475 billion;
Nonagency mortgage-related: $11.278 billion;
Total: $49.377 billion.
2011, Q3;
Auto: $17.071 billion;
Credit Cards: $1.877 billion;
Home Equity: $0.656 billion;
Student loans: $1.904 billion;
Nonagency mortgage-related: $11.254 billion;
Total: $38.225 billion.
2011, Q4;
Auto: $15.045 billion;
Credit Cards: $7.443 billion;
Home Equity: 0;
Student loans: $2.144 billion;
Nonagency mortgage-related: $5.956 billion;
Total: $36.694 billion.
2012, Q1;
Auto: $25.81 billion;
Credit Cards: $5.514 billion;
Home Equity: $0.55 billion;
Student loans: $2.522 billion;
Nonagency mortgage-related: $6.217 billion;
Total: $53.788 billion.
2012, Q2;
Auto: $24.26 billion;
Credit Cards: $12.127 billion;
Home Equity: $0.681 billion;
Student loans: $8.695 billion;
Nonagency mortgage-related: $12.334 billion;
Total: $66.754 billion.
Source: Securities Industry and Financial Markets Association.
Note: Figure 9 does not include agency mortgage-related ABS data. Data
on equipment, manufactured housing, and other ABS are not separately
plotted but are included in the total. Dollar amounts are adjusted for
inflation and are expressed in billions of 2012 Q2 dollars.
[End of figure]
SEC’s Rules on Shareholder Approval of Executive Compensation and
Golden Parachute Compensation Arrangements:
Section 951 of the Dodd-Frank Act amends the Securities Exchange Act
of 1934, requiring public companies subject to the proxy rules to
conduct a separate shareholder advisory vote on compensation for
executives at least every 3 years and a shareholder advisory vote on
the frequency of these votes at least every 6 years. The amendment
also requires a shareholder advisory vote on whether to approve
certain so-called “golden parachute” compensation arrangements in
connection with a business merger or acquisition transaction.[Footnote
111] The rule promulgated under section 951 requires a separate
shareholder vote on compensation of executives and a vote on the
frequency of these votes for the first annual or other meeting of
shareholders at which directors will be elected and for which SEC’s
rules require executive compensation disclosure pursuant to item 402
of Regulation 5-K occurring on or after January 21, 2011.[Footnote
112] The rule became effective on April 4, 2011. However, SEC adopted
a temporary exemption for smaller reporting companies that does not
require them to conduct shareholder advisory votes on executive
compensation and their frequency until after January 21,
2013.[Footnote 113]
Two proxy seasons have passed since SEC’s say-on-pay rule became
effective for larger reporting firms, and most companies have received
majority shareholder approval of their executive compensation
packages.[Footnote 114] Table 9 shows historical data on companies’
proposals on executive compensation subject to shareholder vote (say-
on-pay proposals).[Footnote 115] The data show that nearly 3,200
companies provided shareholders with say-on-pay proposals in 2011. In
that year, 2,809 Russell 3000 companies had say-on-pay proposals and
around 99 percent of the proposals were approved.[Footnote 116] A
study by the Council of Institutional Investors found that the most
frequently cited reason for shareholder opposition for failed
proposals conducted between January 1 and July 1, 2011, was a
disconnect between pay and performance.[Footnote 117] Table 9 also
shows that in 2012 (as of June 25, 2012), 1,842 companies in the index
had say-on-pay proposals and around 97 percent of the proposals were
approved.[Footnote 118] According to SEC, around 1,200 smaller
reporting companies are required to hold say-on-pay proposals in 2013.
In addition, according to the Institutional Shareholder Services
(ISS), a large proxy advisory firm, investors overwhelmingly have
supported that future say-on-pay votes be done annually.[Footnote 119]
Table 9: Public Companies’ Say-on-Pay Proposals, from 2007 through
June 25, 2012:
Year: 2007;
U.S. Total: Say-on-pay proposals: 6;
Russell 3000 Companies:
Say-on-pay proposals: 2;
Failed say-on-pay proposals (percent failed)[A]: 0 (0%).
Year: 2008;
U.S. Total: Say-on-pay proposals: 13;
Russell 3000 Companies:
Say-on-pay proposals: 8;
Failed say-on-pay proposals (percent failed)[A]: 0 (0%).
Year: 2009;
U.S. Total: Say-on-pay proposals: 331;
Russell 3000 Companies:
Say-on-pay proposals: 154;
Failed say-on-pay proposals (percent failed)[A]: 0 (0%).
Year: 2010;
U.S. Total: Say-on-pay proposals: 326;
Russell 3000 Companies:
Say-on-pay proposals: 154;
Failed say-on-pay proposals (percent failed)[A]: 3 (2%).
Year: 2011;
U.S. Total: Say-on-pay proposals: 3,188;
Russell 3000 Companies:
Say-on-pay proposals: 2,809;
Failed say-on-pay proposals (percent failed)[A]: 41 (1%).
Year: Jan. 1, 2012-June 25, 2012[B];
U.S. Total: Say-on-pay proposals: 2,203;
Russell 3000 Companies:
Say-on-pay proposals: 1,842;
Failed say-on-pay proposals (percent failed)[A]: 49 (3%).
Source: GAO summary of data from Institutional Shareholder Services,
Inc.
[A] A shareholder can choose to vote “for” or “against” a say-on-pay
proposal. She can also choose to take a neutral stance and submit an “
abstain” vote. If a shareholder fails to provide instructions to her
broker, the corresponding votes are categorized as “broker non-votes.”
ISS defined failed proposals as those where the “against” votes
outnumber the “for” votes.
[B] ISS data for 2012 include say-on-pay proposals as of June 25,
2012, which likely capture most of the 2012 proposals, because votes
usually take place between March and June.
Note: Companies that held say-on-pay votes on executive compensation
proposals before 2011 include companies that have received financial
assistance under the Troubled Asset Relief Program (TARP). These
companies have been required to hold annual say-on-pay votes until
they pay back all the money they borrowed from the government, at
which time they will become subject to the say-on-pay rules applicable
to other public companies.
[End of table]
Although it is not clear how companies will react to the results of
shareholder say-on-pay votes in the future, according to two experts,
some failed votes have led to, among other actions, shareholder
lawsuits and changes in pay practices. For example, according to the
law firm Davis Polk & Wardwell LLP corporate governance blog, as of
September 5, 2012, shareholders at a number of public companies that
had failed votes have brought lawsuits against the boards of
directors, but the courts largely have ruled in favor of the public
companies. In its study, Semler Brossy also found that 26 out of 30
companies that had failed say-on-pay proposals in 2011 had passed
their 2012 proposals (as of September 2012) due, in part, to changes
in pay practices.[Footnote 120] Additionally, the study noted that
companies that received modest shareholder approval of say-on-pay
proposals in 2011 also have improved their records. According to the
study, 93 of 125 companies that received from 50 percent to 70 percent
shareholder approval of say-on-pay proposals in 2011 received more
support in 2012.
Agency Comments and Our Evaluation:
We provided a draft of this report to CFPB, CFTC, FDIC, the Federal
Reserve Board, FSOC, NCUA, OCC, OFR, SEC, and Treasury for review and
comment. SEC and Treasury provided written comments that we have
reprinted in appendixes VII and VIII, respectively. All of the
agencies also provided technical comments, which we have incorporated,
as appropriate.
In their comments, the agencies neither agreed nor disagreed with the
report’s findings. In its letter, Treasury noted that FSOC agrees that
successful implementation of the Dodd-Frank Act rulemakings will
require member agencies to work together, even if such coordination is
not specifically required under the Dodd-Frank Act. Treasury also
noted that FSOC has served as a forum for discussion among members and
member agencies, through various FSOC meetings, committee meetings,
and subcommittee meetings. Finally, the letter describes FSOC’s effort
to continue monitor potential risks to the financial stability and
implement other statutory requirements.
In its letter, SEC noted that it revised its guidance on economic
analysis in March 2012, in part in response to a recommendation in our
2011 report that federal financial regulators more fully incorporate
OMB’s regulatory analysis guidance into their rulemaking policies. SEC’
s letter stated that the revised guidance already has improved the
quality of economic analysis in its rulemakings and internal rule-
writing processes. SEC also noted that FSOC has fostered a healthy and
positive sense of collaboration among the financial regulators. SEC
remains amenable to working with FSOC on formal coordination policies,
as GAO previously recommended, but noted that FSOC's efforts should
fully respect the independence of the respective member agencies
regarding the substance of the rules for which they are responsible
and the mission of FSOC itself.
We are sending copies of this report to CFPB, CFTC, FDIC, the Federal
Reserve Board, FSOC, NCUA, OCC, OFR, SEC, Treasury, interested
congressional committees, members, and others. This report will also
be available at no charge on our website at [hyperlink,
http://www.gao.gov].
Should you or your staff have questions concerning this report, please
contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix IX.
Signed by:
A. Nicole Clowers:
Director:
Financial Markets and Community Investment:
List of Addressees:
The Honorable Harry Reid:
Majority Leader:
The Honorable Mitch McConnell:
Minority Leader:
United States Senate:
The Honorable John Boehner:
Speaker:
The Honorable Nancy Pelosi:
Minority Leader:
House of Representatives:
The Honorable Debbie Stabenow:
Chairwoman:
The Honorable Pat Roberts:
Ranking Member:
Committee on Agriculture, Nutrition and Forestry:
United States Senate:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable John D. Rockefeller IV:
Chairman:
The Honorable Kay Bailey Hutchison:
Ranking Member:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable Frank D. Lucas:
Chairman:
The Honorable Collin C. Peterson:
Ranking Member:
Committee on Agriculture:
House of Representatives:
The Honorable Hal Rogers:
Chairman:
The Honorable Norm Dicks:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable Fred Upton:
Chairman:
The Honorable Henry A. Waxman:
Ranking Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
Our objectives in this report were to examine (1) the regulatory
analyses, including benefit-cost analyses, federal financial
regulators have performed to assess the potential impact of selected
final rules issued pursuant to the Dodd-Frank Act; (2) how federal
financial regulators consulted with each other in implementing
selected final rules issued pursuant to the Dodd-Frank Act to avoid
duplication or conflicts; and (3) what is known about the impact of
the final Dodd-Frank Act regulations on the financial markets.
To address the first two objectives, we limited our analysis to the
final rules issued pursuant to the Dodd-Frank Act that were effective
between July 21, 2011, and July 23, 2012, a total of 66 rules (see
app. II). To identify these rules, we used a website maintained by the
Federal Reserve Bank of St. Louis that tracks Dodd-Frank Act
regulations. We corroborated the data with information on Dodd-Frank
Act rulemaking compiled by the law firm Davis Polk & Wardwell LLP.
To address our first objective, we reviewed statutes, regulations, GAO
studies, and other documentation to identify the benefit-cost or
similar analyses federal financial regulators are required to conduct
in conjunction with rulemaking. For each of the 66 rules within our
scope, we prepared individual summaries using a data collection
instrument (DCI). The criteria used in the DCI were generally
developed based on the regulatory analyses required of federal
financial regulators and Office of Management and Budget (OMB)
Circular A-4, which is considered best practice for regulatory
analysis. We used the completed summaries to develop a table showing
the extent to which the federal financial regulators addressed the
criteria for each of the Dodd-Frank Act regulations. We selected 4 of
the 66 rules for in-depth review, comparing the benefit-cost or
similar analyses to specific principles in OMB Circular A-4. We
selected the rules for in-depth review based on whether the rule was
deemed a major rule (i.e., whether it is anticipated to have an annual
effect on the economy of $100 million or more) by the responsible
agency and OMB. We generally found that the financial regulators do
not state in the Federal Register notice whether the rule is major.
However, we learned that regulators are required to submit major rules
to GAO under the Congressional Review Act (CRA) for the purpose of
ensuring that the regulators followed certain requirements in
conducting the rulemaking, and GAO maintains a database of major
rules. Our search of the CRA database showed that federal financial
regulators issued 19 major Dodd-Frank Act rules within our scope. To
further narrow the list of rules for in-depth review, we determined to
include at least one rule from each of the federal financial
regulators. We identified major rules issued by only three financial
regulators: the Commodity Futures Trading Commission (CFTC), the Board
of Governors of the Federal Reserve (Federal Reserve), and the
Securities and Exchange Commission (SEC). In addition, the Department
of the Treasury (Treasury) issued a major rule during the scope
period. The Federal Reserve and Treasury each issued only one major
rule during our scope period—the Debit Card Interchange Fee rule and
the Assessment of Fees on Large Bank Holding Companies to Cover the
Expenses of the Financial Research Fund, respectively. SEC and CFTC
issued multiple major rules during the period. To further narrow the
list of rules for in-depth review, we determined to include only rules
implementing a new regulatory authority rather than amending a
preexisting regulatory authority. For SEC, only one rule met this
criterion—the Securities Whistleblower Incentives and Protections
rule. CFTC issued several major rules that met this criterion so to
further narrow the list of rules for in-depth review, we consulted
with a former CFTC economist and solicited his opinion whether it
would be appropriate for GAO to assess the Real-Time Public Reporting
of Swap Transaction Data rule, and he agreed. To compare these rules
to the principles in Circular A-4, we developed a DCI with the
principles and applied the DCI to all four rules. In conducting each
individual analysis, we reviewed the Federal Register notices prepared
by the agencies during the course of the rulemaking. We also
interviewed officials from CFTC, the Federal Reserve, SEC, and
Treasury to determine the extent to which benefit-cost or similar
analyses were conducted.
To address our second objective, we reviewed the Dodd-Frank Act,
regulations, and studies, including GAO reports, to identify the
coordination and consultation requirements federal financial
regulators are required to conduct in conjunction with rulemaking. For
each of the 66 rules in our scope, we reviewed the rule releases to
determine the rules on which agencies coordinated with other federal
financial regulators and international financial regulators. From our
review of the rule releases, we developed a table that shows the rules
that involved coordination, agencies involved, nature of coordination,
whether coordination was required or voluntary, and whether the
agencies coordinated with international regulators. Rules that may
have involved interagency coordination in the rulemaking but did not
expressly mention such coordination in the rule release are not
included in this table. Of the 19 rules that we determined involved
interagency coordination, we selected 3 rules to review in depth to
assess how and the extent to which federal financial regulators
coordinated, focusing on actions they took to avoid conflict and
duplication in rulemakings. In selecting rules to review in depth, we
sought to include at least one rule that was jointly issued and
therefore implicitly required coordination and at least one rule that
was issued by a single agency and involved coordination with another
agency. We also sought broad coverage of agencies issuing substantive
Dodd-Frank Act rules. We ultimately selected two joint rules and one
rule issued by a single agency, including rules issued by FDIC, OCC,
Federal Reserve, CFTC, and SEC. In reviewing each rule, we reviewed
the Federal Register notices for each rule, and we interviewed
officials from each agency to determine how and the extent to which
coordination took place to avoid duplication and conflict. We also
interviewed officials at FSOC and CFPB to get an understanding of
their role in interagency coordination for Dodd-Frank Act rulemakings.
To address our third objective, we took a multipronged approach to
analyze what is known about the impact of the Dodd-Frank Act on the
financial marketplace. First, the act contains provisions that serve
to enhance the resilience of certain bank and nonbank financial
companies and reduce the potential for any one of these companies to
affect the financial system and economy. Specifically, the Dodd-Frank
Act requires the Federal Reserve to impose enhanced prudential
standards and oversight on bank holding companies with $50 billion or
more in total consolidated assets and nonbank financial companies
designated by FSOC. For purposes of this report, we refer to these
bank and nonbank financial companies as bank systemically important
financial institutions (bank SIFI) and nonbank systemically important
financial institutions (nonbank SIFI), respectively, or collectively
as SIFIs. We developed indicators to monitor changes in certain
characteristics of SIFIs that may be suggestive of the impact of these
reforms. FSOC has not yet designated any nonbank financial firms for
Federal Reserve enhanced supervision. As a result, we focus our
analysis on U.S. bank SIFIs.[Footnote 121] To understand the rationale
behind the act’s focus on enhanced SIFI regulation and oversight, we
reviewed the legislative history of the act, the act itself, related
regulations, academic studies, GAO and agency reports, and other
relevant documentation. To inform our choice of indicators, we
analyzed the provisions and related rulemakings most relevant to bank
SIFIs. Our analysis and indicators for this report focus on bank SIFIs’
asset size, interconnectedness, complexity, leverage, and liquidity. We
developed our indicators of bank SIFIs’ size, leverage, and liquidity
using quarterly data for bank holding companies from SNL Financial and
quarterly data on the gross domestic product (GDP) deflator from the
Bureau of Economic Analysis, both for the period from 2006 quarter 1
to 2012 quarter 2.[Footnote 122] We developed our indicators of bank
SIFIs’ complexity using data from the Federal Reserve Board’s National
Information Center as of October 2012.[Footnote 123] As new data
become available, we expect to update and, as warranted, revise our
indicators and create additional indicators to cover other provisions.
[Footnote 124]
Second, we use difference-in-difference regression analysis to infer
the act’s impact on the provision of credit by and the safety and
soundness of U.S. bank SIFIs. The key element of our analysis is that
the Dodd-Frank Act subjects some bank holding companies to enhanced
oversight and regulation but not other bank holding companies.
Specifically, the act requires the Federal Reserve to impose a number
of enhanced prudential standards on bank holding companies with total
consolidated assets of $50 billion or more (bank SIFI), while bank
holding companies with assets less than $50 billion (non-SIFI banks)
are not subject to such enhanced oversight and regulation. As a
result, we were able to compare funding costs, capital adequacy, asset
quality, earnings, and liquidity for bank SIFIs and non-SIFI banks
before and after the Dodd-Frank Act. All else being equal, the
difference in the differences is the inferred effect of the Dodd-Frank
Act on bank SIFIs. For our analysis, we used quarterly data on bank
holding companies from SNL Financial and quarterly data on commercial
banks and savings banks from FDIC and the Federal Financial
Institutions Examinations Council, all for the period from 2006
quarter 1 to 2012 quarter 2 (see app. IV for details). Lastly, for all
of our indicators, we obtained and addressed high-level comments and
suggestions from FSOC staff and two other market experts.
Third, we analyze the impact of several major rules that were issued
pursuant to the Dodd-Frank Act and have been final for around a year
or more. There were 44 final rules as of July 21, 2011, 7 of which
were major rules. We judgmentally selected 4 out of those 7 rules for
impact analyses, based largely on data availability. Our selected
rules implement provisions that serve specific investor or consumer
protection purposes. We first analyzed the Federal Reserve’s Debit
Interchange Fees and Routing Rule (Regulation II). As part of that
work, we reviewed selected statutes and regulations, analyzed
available data and documents from the Federal Reserve, GAO, and market
participants and experts, and interviewed agency officials and market
experts. Additionally, we analyzed two SEC rules on asset-backed
securities (ABS): Issuer Review of Assets in Offerings of ABS and
Disclosure for ABS Required by Section 945 and 943 of the Act,
respectively. To do this, we reviewed selected statutes and
regulations and analyzed data on ABS issuances obtained from the
Securities Industry and Financial Markets Association (SIFMA). Lastly,
we analyzed SEC’s rule on Shareholder Approval of Executive
Compensation and Golden Parachute Compensation. As part of that
analysis, we reviewed selected regulations and analyzed available data
on shareholder votes on executive compensation that we obtained from
Institutional Shareholder Services, Inc., a proxy advisory firm that
advises institutional investors on how to vote proxies and provides
consulting services to corporations seeking to improve their corporate
governance. For all of the data described above, we assessed the
reliability of the data and found it to be reliable for our purposes.
We conducted this performance audit from December 2011 to December
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Tables Listing Dodd-Frank Act Rules Effective as of July
23, 2012:
The following table lists the Dodd-Frank Act rules that we identified
as final and effective during the scope period for this review—July
21, 2011, and July 23, 2012
Table 10: Dodd-Frank Act Rules Effective between July 21, 2011, and
July 23, 2012:
Rulemaking: Risk-Based Capital Standards: Advanced Capital Adequacy
Framework—Basel II; Establishment of a Risk-Based Capital Floor;
Responsible regulator: FDIC, Federal Reserve, and OCC;
Effective date: 07/28/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No[A];
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Securities Whistleblower Incentives and Protections;
Responsible regulator: SEC;
Effective date: 08/12/11;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Prohibition on the Employment, or Attempted Employment, of
Manipulative and Deceptive Devices and Prohibition on Price
Manipulation;
Responsible regulator: CFTC;
Effective date: 08/15/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Fair Credit Reporting Risk-Based Pricing Regulations;
Responsible regulator: Federal Reserve and Federal Trade Commission;
Effective date: 08/15/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Equal Credit Opportunity;
Responsible regulator: Federal Reserve;
Effective date: 08/15/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Certain Orderly Liquidation Authority Provisions under
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
Act;
Responsible regulator: FDIC;
Effective date: 08/15/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Public Company Accounting Oversight Board; Order Approving
Proposed Board Funding Final Rules for Allocation of the Board’s
Accounting Support Fee Among Issuers, Brokers, and Dealers, and Other
Amendments to the Board’s Funding Rules;
Responsible regulator: SEC;
Effective date: 08/18/11;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Authority to Designate Financial Market Utilities (FMU) as
Systemically Important;
Responsible regulator: FSOC;
Effective date: 08/26/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Family Offices;
Responsible regulator: SEC;
Effective date: 08/29/11;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? Yes;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Security Ratings;
Responsible regulator: SEC;
Effective date: 09/02/11; 12/31/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Agricultural Commodity Definition;
Responsible regulator: CFTC;
Effective date: 09/12/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Retail Foreign Exchange Transactions; Conforming Changes
to Existing Regulations in Response to the Dodd-Frank Wall Street
Reform and Consumer Protection Act;
Responsible regulator: CFTC;
Effective date: 09/12/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Rules Implementing Amendments to the Investment Advisers
Act of 1940;
Responsible regulator: SEC;
Effective date: 07/21/11; 09/19/11;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? Yes;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Privacy of Consumer Financial Information; Conforming
Amendments Under Dodd-Frank Act;
Responsible regulator: CFTC;
Effective date: 09/20/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Large Trader Reporting for Physical Commodity Swaps;
Responsible regulator: CFTC;
Effective date: 09/20/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Business Affiliate Marketing and Disposal of Consumer
Information Rules;
Responsible regulator: CFTC;
Effective date: 09/20/11[B];
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Suspension of the duty to file reports for classes of
asset-backed securities;
Responsible regulator: SEC;
Effective date: 09/22/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Removing Any Reference to or Reliance on Credit Ratings in
Commission Regulations; Proposing Alternatives to the Use of Credit
Ratings;
Responsible regulator: CFTC;
Effective date: 09/23/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Process for Review of Swaps for Mandatory Clearing;
Responsible regulator: CFTC;
Effective date: 09/26/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Provisions Common to Registered Entities;
Responsible regulator: CFTC;
Effective date: 09/26/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Debit Card Interchange Fees and Routing;
Responsible regulator: Federal Reserve;
Effective date: 10/01/11[B];
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Whistleblower Incentives and Protection;
Responsible regulator: CFTC;
Effective date: 10/24/11;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Swap Data Repositories: Registration Standards, Duties and
Core Principles;
Responsible regulator: CFTC;
Effective date: 10/31/11;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Disclosure of Information; Privacy Act Regulations; Notice
and Amendments;
Responsible regulator: FDIC;
Effective date: 11/14/11;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Resolution Plans Required;
Responsible regulator: Federal Reserve and FDIC;
Effective date: 11/30/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Remittance Transfers;
Responsible regulator: NCUA;
Effective date: 11/30/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Amendment to July 14, 2011 Order for Swap Regulation;
Responsible regulator: CFTC;
Effective date: 12/23/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Capital Plans;
Responsible regulator: Federal Reserve;
Effective date: 12/30/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Agricultural Swaps Rule;
Responsible regulator: CFTC;
Effective date: 12/31/11;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Derivatives Clearing Organization General Provisions and
Core Principles;
Responsible regulator: CFTC;
Effective date: 01/09/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Position Limits for Futures and Swaps;
Responsible regulator: CFTC;
Effective date: 01/17/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs?
Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Performance of Registration Functions by National Futures
Association with Respect to Swap Dealers and Major Swap Participants;
Responsible regulator: CFTC;
Effective date: 01/19/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Mine Safety Disclosure;
Responsible regulator: SEC;
Effective date: 01/27/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Reporting Line for the Commission’s Inspector General;
Responsible regulator: SEC;
Effective date: 02/14/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Investment of Customer Funds and Funds Held in an Account
for Foreign Futures and Foreign Options Transactions;
Responsible regulator: CFTC;
Effective date: 02/17/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Registration of Foreign Boards of Trade;
Responsible regulator: CFTC;
Effective date: 02/21/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Net Worth Standard for Accredited Investors;
Responsible regulator: SEC;
Effective date: 02/27/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Real-Time Reporting of Swap Transaction Data;
Responsible regulator: CFTC;
Effective date: 03/09/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Swap Data Recordkeeping and Reporting Requirements;
Responsible regulator: CFTC;
Effective date: 03/13/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Registration of Swap Dealers and Major Swap Participants;
Responsible regulator: CFTC;
Effective date: 03/19/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF;
Responsible regulator: SEC and CFTC;
Effective date: 03/31/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Resolution Plans Required for Insured Depository
Institutions With $50 Billion or More in Total Assets;
Responsible regulator: FDIC;
Effective date: 04/01/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions;
Responsible regulator: CFTC;
Effective date: 04/09/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Exemptions for Security-Based Swaps Issued by Certain
Clearing Agencies;
Responsible regulator: SEC;
Effective date: 04/16/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Business Conduct Standards for Swap Dealers and Major Swap
Participants;
Responsible regulator: CFTC;
Effective date: 04/17/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Commodity Pool Operators and Commodity Trading Advisers:
Compliance Obligations;
Responsible regulator: CFTC;
Effective date: 04/24/12; 07/02/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Authority To Require Supervision and Regulation of Certain
Nonbank Financial Companies;
Responsible regulator: FSOC;
Effective date: 05/11/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Implementation of the Freedom of Information Act;
Responsible regulator: FSOC;
Effective date: 05/11/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Investment Advisor Performance Compensation Rule;
Responsible regulator: SEC;
Effective date: 05/22/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? Yes;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Mutual Insurance Holding Company Treated as Insurance
Company;
Responsible regulator: FDIC;
Effective date: 05/30/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants;
Responsible regulator: CFTC;
Effective date: 06/04/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Statement of Policy Regarding the Conformance Period for
Entities Engaged in Prohibited Proprietary Trading or Private Equity
Fund or Hedge Fund Activities;
Responsible regulator: Federal Reserve;
Effective date: 06/08/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Commodity Options;
Responsible regulator: CFTC;
Effective date: 06/26/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: State Official Notification Rule;
Responsible regulator: CFPB;
Effective date: 06/29/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Rules Relating to Investigations;
Responsible regulator: CFPB;
Effective date: 06/29/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Rules of Practice for Adjudication Proceedings;
Responsible regulator: CFPB;
Effective date: 06/29/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Collection of Checks and Other Items by Federal Reserve
Banks and Funds Transfers Through Fedwire: Elimination of "As-of
Adjustments" and Other Clarifications;
Responsible regulator: Federal Reserve;
Effective date: 07/12/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Assessment of Fees on Large Bank Holding Companies and
Nonbank Financial Companies Supervised by the Federal Reserve Board To
Cover the Expenses of the Financial Research Fund;
Responsible regulator: Treasury;
Effective date: 07/20/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Rulemaking: Supervised Securities Holding Company Registration;
Responsible regulator: Federal Reserve;
Effective date: 07/20/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Alternatives to the Use of External Credit Ratings in the
Regulations of the OCC;
Responsible regulator: OCC;
Effective date: 07/21/12; 01/01/13;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No[A];
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Permissible Investments for Federal and State Savings
Associations: Corporate Debt Securities;
Responsible regulator: FDIC;
Effective date: 07/21/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Guidance on Due Diligence Requirements for Savings
Associations in Determining Whether a Corporate Debt Security Is
Eligible for Investment;
Responsible regulator: FDIC;
Effective date: 07/21/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Guidance on Due Diligence Requirements in Determining
Whether Securities Are Eligible for Investment;
Responsible regulator: OCC;
Effective date: 01/01/13[C];
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs? N/A;
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Supervisory Guidance on Stress Testing for Banking
Organizations With More Than $10 Billion in Total Consolidated Assets;
Responsible regulator: FDIC, Federal Reserve, and OCC;
Effective date: 07/23/12;
Did regulator identify the rule as having significant economic impact?
N/A;
Did regulator quantify costs of final rule other than PRA costs?
N/A[A];
Did regulator quantify benefits of final rule? N/A;
Did regulator qualitatively identify costs of final rule? N/A;
Did regulator qualitatively identify benefits of final rule? N/A.
Rulemaking: Calculation of Maximum Obligation Limitation;
Responsible regulator: FDIC and Treasury;
Effective date: 07/23/12;
Did regulator identify the rule as having significant economic impact?
No;
Did regulator quantify costs of final rule other than PRA costs? No;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? No;
Did regulator qualitatively identify benefits of final rule? No.
Rulemaking: Further Definition of "Swap Dealer," "Security-Based Swap
Dealer," "Major Swap Participant," "Major Security-Based Swap
Participant," and "Eligible Contract Participant;"
Responsible regulator: CFTC and SEC;
Effective date: 07/23/12; 12/31/12;
Did regulator identify the rule as having significant economic impact?
Yes;
Did regulator quantify costs of final rule other than PRA costs? Yes;
Did regulator quantify benefits of final rule? No;
Did regulator qualitatively identify costs of final rule? Yes;
Did regulator qualitatively identify benefits of final rule? Yes.
Source: GAO summary of information from the Federal Register, the
Federal Reserve Bank of St. Louis [hyperlink,
http://www.stlouisfed.org/regreformrules/final.aspx] and Davis Polk &
Wardwell LLP.
Note: N/A refers to those rulemakings related to interpretive rules,
general statements of policy, and rules that deal with agency
organization, procedure, or practice, and thus not subject to
Administrative Procedure Act (APA) requirements.
[A] OCC undertook an assessment of these rules, which included
quantified total cost estimates, but the assessments were not
published in the Federal Register notices.
[B] Compliance dates vary.
[C] OCC’s guidance is included in this review, even though the
effective date is outside our scope period, because the accompanying
rule and similar FDIC guidance are included in this review.
[End of table]
The following table lists the Dodd-Frank Act rules that we identified
as final and effective during the scope period for our first review—
July 21, 2010, and July 21, 2011.
Table 11: Dodd-Frank Act Rules Effective as of July 21, 2011
Rulemaking: Deposit Insurance Regulations; Permanent Increase in
Standard Coverage Amount; Advertisement of Membership; International
Banking; Foreign Banks (75 Fed. Reg. 49,363);
Responsible regulator: FDIC;
Effective date: 8/13/2010;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Display of Official Sign; Permanent Increase in Standard
Maximum Share (75 Fed. Reg. 53,841);
Responsible regulator: NCUA;
Effective date: 9/2/2010;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Internal Controls over Financial Reporting in Exchange Act
Periodic Reports (75 Fed. Reg. 57,385);
Responsible regulator: SEC;
Effective date: 9/21/2010;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Commission Guidance Regarding Auditing, Attestation, and
Related Professional Practice Standards Related to Brokers and Dealers
(75 Fed. Reg. 60,616);
Responsible regulator: SEC;
Effective date: 10/1/2010;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Removal from Regulation FD of the Exemption for Credit
Rating Agencies (75 Fed. Reg. 61,050);
Responsible regulator: SEC;
Effective date: 10/4/2010;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries (75 Fed. Reg. 55,410);
Responsible regulator: CFTC;
Effective date: 10/18/2010;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Deposit Insurance Regulations: Unlimited Coverage for
Noninterest-Bearing Transaction Accounts (75 Fed. Reg. 69,577);
Responsible regulator: FDIC;
Effective date: 12/31/2010;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Designated Reserve Ratio (75 Fed. Reg. 79,286);
Responsible regulator: FDIC;
Effective date: 1/1/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Rules of Practice – Handling of Proposed Rule Changes
Submitted by Self-Regulatory Organizations (76 Fed. Reg. 4066);
Responsible regulator: SEC;
Effective date: 1/24/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Deposit Insurance Regulations; Unlimited Coverage for
Noninterest-Bearing Transaction Accounts; Inclusion of Interest on
Lawyers Trust Accounts (76 Fed. Reg. 4813);
Responsible regulator: FDIC;
Effective date: 1/27/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Issuer Review of Assets in Offerings of Asset-Back
Securities (76 Fed. Reg. 4231);
Responsible regulator: SEC;
Effective date: 3/28/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? Yes.
Rulemaking: Disclosure for Asset-Backed Securities Required by Section
943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(76 Fed. Reg. 4489);
Responsible regulator: SEC;
Effective date: 3/28/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? Yes.
Rulemaking: Conformance Period for Entities Engaged in Prohibited
Proprietary Trading or Private Equity Fund or Hedge Fund Activities
(76 Fed. Reg. 8265);
Responsible regulator: Federal Reserve;
Effective date: 4/1/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Assessments, Large Bank Pricing (76 Fed. Reg. 10,672);
Responsible regulator: FDIC;
Effective date: 4/1/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Higher Rate Threshold for Escrow Requirements (76 Fed.
Reg. 11,319);
Responsible regulator: Federal Reserve;
Effective date: 4/1/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Shareholder Approval of Executive Compensation and Golden
Parachute Compensation (76 Fed. Reg. 6010);
Responsible regulator: SEC;
Effective date: 4/4/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? Yes.
Rulemaking: Establishment of the FDIC Systemic Resolution Advisory
Committee (76 Fed. Reg. 25,352);
Responsible regulator: FDIC;
Effective date: 4/28/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Order Directing Funding for the Governmental Accounting
Standards Board (76 Fed. Reg. 28,247);
Responsible regulator: SEC;
Effective date: 5/16/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Share Insurance and Appendix (76 Fed. Reg. 30,250);
Responsible regulator: NCUA;
Effective date: 6/24/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Modification of Treasury Regulations Pursuant to Section
939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(76 Fed. Reg. 39,278);
Responsible regulator: Treasury;
Effective date: 7/6/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Retail Foreign Exchange Transactions (76 Fed. Reg. 40,779);
Responsible regulator: FDIC;
Effective date: 7/15/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Retail Foreign Exchange Transactions (76 Fed. Reg. 41,375);
Responsible regulator: OCC;
Effective date: 7/15/2011;
Did the regulator have some level of discretion? Yes ;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Beneficial Ownership Reporting Requirements and Security-
Based Swaps (76 Fed. Reg. 34,579);
Responsible regulator: SEC;
Effective date: 7/16/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Prohibition Against Payment of Interest on Demand Deposits
(76 Fed. Reg. 42,015);
Responsible regulator: Federal Reserve;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: List of OTS Regulations to be Enforced by the OCC and FDIC
Pursuant to the Dodd-Frank Act (76 Fed. Reg. 39,246);
Responsible regulator: OCC/FDIC;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Office of Thrift Supervision Integration; Dodd-Frank Act
Implementation (76 Fed. Reg. 43,549);
Responsible regulator: OCC;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Exemptions for Advisers to Venture Capital Funds, Private
Fund Advisers With Less Than $150 Million in Assets Under Management,
and Foreign Private Advisers (76 Fed. Reg. 39,646);
Responsible regulator: SEC;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? Yes;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Consumer Transfer Protection Date (75 Fed. Reg. 57,252);
Responsible regulator: CFPB;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Identification of Enforceable Rules and Orders (76 Fed.
Reg. 43,569);
Responsible regulator: CFPB;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? n/a;
Did the regulator identify the rule as having significant economic
impact? n/a.
Rulemaking: Consumer Leasing – Exempt Consumer Credit under Regulation
M (75 Fed. Reg. 18,349);
Responsible regulator: Federal Reserve;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Truth in Lending – Exempt Consumer Credit under Regulation
Z (76 Fed. Reg. 18,354);
Responsible regulator: Federal Reserve;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Rulemaking: Interest on Deposits; Deposit Insurance Coverage (76 Fed.
Reg. 41,392);
Responsible regulator: FDIC;
Effective date: 7/21/2011;
Did the regulator have some level of discretion? No;
Did the regulator identify the rule as having significant economic
impact? No.
Source: GAO summary of information from the Federal Register and
Federal Reserve Bank of St. Louis [hyperlink,
http://www.stlouisfed.org/regreformrules/final.aspx].
Note: N/A refers to those rulemakings related to interpretive rules,
general statements of policy, and rules that deal with agency
organization, procedure, or practice, and thus not subject to APA
requirements. In some instances, we found that an agency had
discretion to implement the statute, even though the discretion was
limited, because the exercise of discretion was important to
implementation.
[End of table]
[End of section]
Appendix III: Summary of Rulemakings Related to the Dodd-Frank Act
Provisions Applicable to Systemically Important Financial Institutions:
The Dodd-Frank Act contains several provisions that apply to nonbank
financial companies designated by the Financial Stability Oversight
Council for Federal Reserve supervision and enhanced prudential
standards (nonbank SIFI) and bank holding companies with $50 billion
or more in total consolidated assets (bank SIFI). Table 12 summarizes
those provisions and the rulemakings, including their status, to
implement those provisions.
Table 12: Rulemakings Implementing the Dodd-Frank Act Provisions
Applicable to Systemically Important Financial Institutions and Their
Status as of October 12, 2012:
Dodd-Frank Act provision: FSOC designation of Nonbanks for Federal
Reserve supervision—Section 113 authorizes FSOC to determine that a
nonbank financial company shall be subject to enhanced prudential
standards and supervision by the Federal Reserve if FSOC determines
that the company could pose a threat to the financial stability of the
U.S.
Rulemaking status: FSOC final rule 77 Fed. Reg. 21,637(Apr. 11, 2012).
Dodd-Frank Act provision: FSOC’s final rule describes the manner in
which FSOC intends to apply the statutory standards (for size,
interconnectedness, complexity, leverage, and liquidity), and the
procedures FSOC intends to follow when making a determination to
designate a nonbank financial institution for Federal Reserve
supervision under section 113 of the act.
Rulemaking status: FSOC has not yet designated any nonbank financial
companies for Federal Reserve supervision.
Dodd-Frank Act provision: Enhanced supervision and prudential
standards—Sections 165 and 166 require the Federal Reserve to impose
enhanced prudential standards and early remediation requirements on
bank holding companies with $50 billion or more in total consolidated
assets and nonbank financial companies designated by FSOC to prevent
or mitigate risks to U.S. financial stability.a
Rulemaking status: Federal Reserve proposed rule 77 Fed. Reg. 594
(Jan. 5, 2012)[B].
Dodd-Frank Act provision: Enhanced risk-based capital and leverage
requirements required under section 165(b)(1)(A)(i)—capital plans:
Bank holding companies with $50 billion or more in total consolidated
assets and nonbank financial companies designated by FSOC would be
subject to the Federal Reserve’s capital plan rule, which requires
companies to submit an annual capital plan to the Board for review
that, together with the proposed stress tests (below), would
demonstrate to the Board that the company has robust, forward-looking
capital planning processes that account for their unique risks and
permit continued operations during times of stress.[C]
Rulemaking status: proposal included in Jan. 5, 2012 proposed rule.
Dodd-Frank Act provision: Enhanced risk-based capital and leverage
requirements required under section 165(b)(1)(A)(i)—capital
surcharges: The Federal Reserve intends to issue a proposal imposing a
quantitative risk-based capital surcharge for all or a subgroup of
bank holding companies with $50 billion or more in total consolidated
assets and nonbank financial companies designated by FSOC based on the
Basel capital surcharge for Globally Systemically Important Banks (G-
SIBs).[D]
Rulemaking status: intention included in Jan. 5, 2012 proposed rule.
Dodd-Frank Act provision: Enhanced liquidity requirements required
under section 165(b)(1)(A)(ii)—liquidity risk management standards:
Bank holding companies with $50 billion or more in total consolidated
assets and nonbank financial companies designated by FSOC would be
subject to liquidity risk management standards that require the
companies, among other things, to project cash flow needs over various
time horizons, stress test the projections at least monthly, determine
a liquidity buffer, and maintain a contingency funding plan that
identifies potential sources of liquidity strain and alternative
sources of funding.
Rulemaking status: proposal included in Jan. 5, 2012 proposed rule.
Dodd-Frank Act provision: Enhanced liquidity requirements required
under Section 165(b)(1)(A)(ii)—Basel liquidity ratios: The Federal
Reserve intends to issue a proposal imposing quantitative liquidity
requirements on all or a subgroup of bank holding companies with $50
billion or more in total consolidated assets and nonbank financial
companies designated by FSOC based on Basel III liquidity ratios.
Rulemaking status: intention included in Jan. 5, 2012 proposed rule.
Dodd-Frank Act provision: Credit exposure reports required under
section 165(d)(2): Section 165 also requires the Federal Reserve and
the Federal Deposit Insurance Corporation (FDIC) to impose credit
exposure reporting requirements on bank holding companies with $50
billion or more in total consolidated assets and nonbank financial
companies designated by FSOC. The joint proposed rule would require
the companies to report significant exposures to other covered
companies and significant exposures that other covered companies have
to that company;
Rulemaking status: Federal Reserve and FDIC proposed rule 76 Fed. Reg.
22,648 (Apr. 22, 2011).
Dodd-Frank Act provision: Concentration limits required under section
165(e): As required by the act, the Federal Reserve would prohibit a
bank holding company with $50 billion or more in total consolidated
assets or a nonbank financial company designated by FSOC from having
credit exposure to any unaffiliated company that exceeds 25 percent of
the company’s capital stock and surplus. The Federal Reserve proposed
a more stringent credit exposure limit of 10 percent between the
largest, more complex financial institutions.
Rulemaking status: proposal included in January 5, 2012 proposed rule.
Dodd-Frank Act provision: Stress Tests required under section 165(i):
Bank holding companies with $50 billion or more in total consolidated
assets and nonbank financial companies designated by FSOC are required
by the act to conduct semi-annual company-run stress tests, and the
Federal Reserve is required to conduct an annual stress test on each
of the companies[E].
The final rule builds on the stress tests required under the capital
plans that large, complex bank holding companies submitted to the
Federal Reserve for supervision under the Supervisory Capital
Assessment Program (SCAP) in 2009, the subsequent Comprehensive
Capital and Analysis Review (CCAR) in 2011, and the capital plan rule
effective Dec. 30, 2011.
Rulemaking status: Federal Reserve final rule 77 Fed. Reg. 62,378
(Oct. 12, 2012).
Dodd-Frank Act provision: Resolution plans required under section
165(d)(1): Section 165 also requires the Federal Reserve and the
Federal Deposit Insurance Corporation (FDIC) to require resolution
plans from bank holding companies with $50 billion or more in total
consolidated assets and nonbank financial companies designated by FSOC.
The joint final rule requires each plan to include, among other
things, information about the company’s ownership structure, core
business lines, and critical operations, and a strategic analysis of
how the SIFI can be resolved under the U.S. Bankruptcy Code in a way
that would not pose systemic risk to the financial system[F].
Rulemaking status: Federal Reserve and FDIC final rule 76 Fed. Reg.
67,323 (Nov. 1, 2011).
Dodd-Frank Act provision: Debt-to-Equity Limits under section 165(j):
Section 165(j) provides that the Federal Reserve must require a bank
holding company with $50 billion or more in total consolidated assets
or a nonbank financial company designated by FSOC to maintain a debt-
to-equity ratio of no more than 15-to-1, upon a determination by the
Council that (i) such company poses a grave threat to the financial
stability of the United States and (ii) the imposition of such a
requirement is necessary to mitigate the risk that the company poses
to U.S. financial stability;
Rulemaking status: proposal included in Jan. 5, 2012 proposed rule.
Dodd-Frank Act provision: Early remediation requirements under section
166: Section 166 requires the Federal Reserve, in consultation with
FSOC and FDIC, to prescribe regulations to provide for the early
remediation of financial distress of bank holding companies with $50
billion or more in total consolidated assets and nonbank financial
companies designated by FSOC.
The proposed requirements would include a number of triggers for
remediation, including capital levels, stress test results, and risk
management weaknesses. In certain situations, the Federal Reserve
would impose restrictions on growth, assets, acquisitions, capital
distributions and executive compensation, and other activities that
the Federal Reserve deems appropriate.
Rulemaking status: proposal included in Jan. 5, 2012 proposed rule.
Dodd-Frank Act provision: FDIC Orderly Liquidation Authority—Title II
gives the FDIC new orderly liquidation authority to act as a receiver
of troubled nonbank financial companies designated by FSOC.
The FDIC has issued and expects to issue a number of rules to exercise
this new authority. The FDIC indicated that the July 15, 2011 rule
represents the culmination of the initial phase of such rulemaking.
Rulemaking status: FDIC final rule 76 Fed. Reg. 41,626 (July 15, 2011).
Dodd-Frank Act provision: Federal Reserve authority to impose
mitigatory actions on certain companies determined to pose a grave
threat to financial stability—Section 121(a) allows the Federal
Reserve, with a two-thirds vote by FSOC, to impose certain additional
restrictions on bank holding companies with $50 billion or more in
total consolidated assets and nonbank financial companies designated
by FSOC determined to pose a grave threat to the financial stability
of the United States, including limiting mergers and acquisitions,
requiring the company to terminate activities, or requiring the
company to sell or transfer assets or off-balance-sheet items to
unaffiliated entities.
Rulemaking status: No rules issued.
Dodd-Frank Act provision: Collins Amendment—Section 171(b) requires
the appropriate federal banking agencies to establish permanent
minimum risk-based capital and leverage floors on insured depository
institutions, depository institution holding companies, and nonbank
financial companies designated by FSOC.
Rulemaking status: Federal Reserve, FDIC, and OCC final rule.
Dodd-Frank Act provision: Under the final rule, these institutions
must calculate their floors using the minimum risk-based capital and
leverage requirements under the prompt corrective action framework
implementing section 38 of the Federal Deposit Insurance Act, which
currently are Basel I’s general risk-based capital rules.
Rulemaking status: 76 Fed. Reg. 37,620 (June 28, 2011).
Dodd-Frank Act provision: Concentration Limit/liability cap on large
financial institutions—Section 622 establishes, subject to
recommendations by FSOC, a financial sector concentration limit that
generally prohibits a financial company from merging or consolidating
with, acquiring all or substantially all of the assets of, or
otherwise acquiring control of, another company if the resulting
company’s consolidated liabilities would exceed 10 percent of the
aggregate consolidated liabilities of all financial companies.[G]
Rulemaking status: No rules issued.
Source: Dodd-Frank Act, Federal Register, and other documents from
regulators and FSOC.
[A] Section 165 also directs the Federal Reserve to impose enhanced
prudential standards for bank holding companies with $50 billion or
more in total consolidated assets and nonbank financial companies
designated by FSOC regarding overall risk management, which also were
proposed in the January 5, 2012, rule. Additionally, section 115 also
authorizes FSOC to recommend additional enhanced prudential standards
for bank holding companies with $50 billion or more in total
consolidated assets and nonbank financial companies designated by FSOC
to the Federal Reserve.
[B] In this January 5, 2012, proposed rule, the Federal Reserve
proposed rules to implement certain but not all of the requirements of
sections 165 and 166 of the Dodd-Frank Act.
[C] Bank SIFIs are already required to comply with the capital plan
rule. The Federal Reserve issued its final capital plans rule on
December 1, 2011 (76 Fed. Reg. 74,631).
[D] In November 2011, the Financial Stability Board (FSB) identified
29 G-SIBs and indicated it would update this list annually each
November. FSB updated this list on November 1, 2012. The updated list
contains 28 G-SIBs; the same eight U.S. bank SIFIs were designated as
G-SIBs in 2011 and 2012. Additionally, on November 1, 2012, FSB
allocated each G-SIB into a bucket corresponding to its different
levels of capital surcharge.
[E] Section 165(i)(2) of the Act requires that any financial company
with more than $10 billion in total consolidated assets and that is
regulated by a federal financial regulatory agency also be subject to
company-run stress tests. The Federal Reserve issued a separate rule
to implement this requirement. 77 Fed. Reg. 62,396 (Oct. 12, 2012).
[F] Bank SIFIs with at least $250 billion in total nonbank assets were
required to submit their first resolution plans by July 1, 2012.
[G] FSOC finalized a report and issued recommendations on implementing
this provision. FSOC asked for comments on its recommendations.
Financial Stability Oversight Council, Study & Recommendations
Regarding Concentration Limits on Large Financial Companies
(Washington, D.C.: January 2011).
[End of table]
[End of section]
Appendix IV: Econometric Analyses of the Impact of Enhanced Regulation
and Oversight on SIFIs:
Methodology:
We conducted an econometric analysis to assess the impact of the Dodd-
Frank Act’s new requirements for bank SIFIs on (1) the cost of credit
they provide and (2) their safety and soundness. Our multivariate
econometric model used a difference-in-difference design that exploits
the fact that the Dodd-Frank Act subjects bank holding companies with
total consolidated assets of $50 billion or more to enhanced
regulation by the Federal Reserve but not others, so we can view bank
holding companies with total consolidated assets of $50 billion or
more (bank SIFIs) as the treatment group and other bank holding
companies as the control group. We compared the changes in the
characteristics of U.S. bank SIFIs over time to changes in the
characteristics of other U.S. bank holding companies over time. All
else being equal, the difference in the differences is the impact of
new requirements for bank SIFIs primarily tied to enhanced regulation
and oversight under the Federal Reserve.
Our general regression specification is the following:
ybq = ab + ßq + .qSIFIbq + X’bqT + ebq.
where b denotes the bank holding company, q denotes the quarter, ybq
is the dependent variable, ab is a bank holding company-specific
intercept, ßq is a quarter-specific intercept, SIFIbq is an indicator
variable that equals 1 if bank holding company b is a SIFI in quarter
q and 0 otherwise, Xbq is a list of other independent variables, and
ebq is an error term. We estimated the parameters of the model using
quarterly data on top-tier bank holding companies for the period from
the first quarter of 2006 to the second quarter of 2012.
The parameters of interest are the .q, the coefficients on the SIFI
indicators in the quarters starting with the treatment start date of
the third quarter of 2010 through the second quarter of 2012. The Dodd-
Frank Act was enacted in July 2010 (the third quarter of 2010), so the
SIFI indicator is equal to zero for all bank holding companies for all
quarters from the first quarter of 2006 to the second quarter of 2010.
The SIFI indicator is equal to 1 for all bank holding companies with
assets of $50 billion or more for the third quarter of 2010 through
the second quarter of 2012 and the SIFI indicator is equal to zero for
all other bank holding companies for those quarters. Thus, for
quarters from the third of 2010 to the second of 2012, the parameter
.q measures the average difference in the dependent variable between
bank SIFIs and other bank holding companies in those quarters relative
to the base quarter.
We use different dependent variables (ybq) to estimate the impacts of
the new requirements for SIFIs on the cost of credit provided by bank
SIFIs and on various aspects of bank SIFIs’ safety and soundness,
including capital adequacy, asset quality, earnings, and liquidity.
* Funding cost. A bank holding company’s funding cost is the cost of
deposits or liabilities that it then uses to make loans or otherwise
acquire assets. More specifically, a bank holding company’s funding
cost is the interest rate it pays when it borrows funds. All else
being equal, the greater a bank holding company’s funding cost, the
greater the interest rate it charges when it makes loans. We measure
funding cost as an institution’s interest expense as a percent of
interest-bearing liabilities.
* Capital adequacy. Capital absorbs losses, promotes public
confidence, helps restrict excessive asset growth, and provides
protection to creditors. We use two alternative measures of capital
adequacy: tangible common equity as a percent of total assets and
tangible common equity as a percent of risk-weighted assets.
* Asset quality. Asset quality reflects the quantity of existing and
potential credit risk associated with the institution’s loan and
investment portfolios and other assets, as well as off-balance sheet
transactions. Asset quality also reflects the ability of management to
identify and manage credit risk. We measure asset quality as
performing assets as a percent of total assets, where performing
assets are equal to total assets less assets 90 days or more past due
and still accruing interest, assets in non-accrual status, and other
real estate owned.
* Earnings. Earnings are the initial safeguard against the risks of
engaging in the banking business and represent the first line of
defense against capital depletion that can result from declining asset
values. We measure earnings as net income as a percent of total assets.
* Liquidity. Liquidity represents the ability to fund assets and meet
obligations as they become due, and liquidity risk is the risk of not
being able to obtain funds at a reasonable price within a reasonable
time period to meet obligations as they become due. We use two
different variables to measure liquidity. The first variable is liquid
assets as a percent of volatile liabilities. This variable is similar
in spirit to the liquidity coverage ratio introduced by the Basel
Committee on Banking Supervision and measures a bank holding company’s
capacity to meet its liquidity needs under a significantly severe
liquidity stress scenario. We measure liquid assets as the sum of cash
and balances due from depository institutions, securities (less
pledged securities), federal funds sold and reverse repurchases, and
trading assets. We measure volatile liabilities as the sum of federal
funds purchased and repurchase agreements, trading liabilities (less
derivatives with negative fair value), other borrowed funds, deposits
held in foreign offices, and large time deposits held in domestic
offices. Large time deposits are defined as time deposits greater than
$100,000 prior to March 2010 and as time deposits greater than
$250,000 in and after March 2010.
The second liquidity variable is stable liabilities as a percent of
total liabilities. This variable measures the extent to which a bank
holding company relies on stable funding sources to finance its assets
and activities. This variable is related in spirit to the net stable
funding ratio introduced by the Basel Committee on Banking
Supervision, which measures the amount of stable funding based on the
liquidity characteristics of an institution’s assets and activities
over a 1 year horizon. We measure stable funding as total liabilities
minus volatile liabilities as described earlier.
Finally, we include a limited number of independent variables (Xbq) to
control for things that may differentially affect SIFIs and non-SIFIs
in the quarters since the Dodd-Frank Act was enacted. We include these
variables to reduce the likelihood that our estimates of the impact of
new requirements for SIFIs are reflecting something other than the
impact of the Dodd-Frank Act’s new requirements for SIFIs.
* Nontraditional income. Nontraditional income generally captures
income from capital market activities. Bank holding companies with
more nontraditional income are likely to have different business
models than those with more income from traditional banking
activities. Changes in capital markets in the period since the Dodd-
Frank Act was enacted may have had a greater effect on bank holding
companies with more nontraditional income. If bank SIFIs typically
have more nontraditional income than other bank holding companies,
then changes in capital markets in the time since the Dodd-Frank Act
was enacted may have differentially affected the two groups. We
measure nontraditional income as the sum of trading revenue;
investment banking, advisory, brokerage, and underwriting fees and
commissions; venture capital revenue; insurance commissions and fees;
and interest income from trading assets less associated interest
expense, and we express nontraditional income as a percent of
operating revenue.
* Securitization income. Bank holding companies with more income from
securitization are likely to have different business models than those
with more income from traditional banking associated with an originate-
to-hold strategy for loans. Changes in the market for securitized
products in the period since the Dodd-Frank Act was enacted may thus
have had a greater effect on bank holding companies with more
securitization income. If bank SIFIs typically have more
securitization income than other bank holding companies, then changes
in the market for securitized products in the time since the Dodd-
Frank Act was enacted may have differentially affected the two groups.
We measure securitization income as the sum of net servicing fees, net
securitization income, and interest and dividend income on mortgage-
backed securities minus associated interest expense, and we express
securitization as a percent of operating revenue. Operating revenue is
the sum of interest income and noninterest income less interest
expense and loan loss provisions.
* Foreign exposure. Changes in other countries, such as the sovereign
debt crisis in Europe, may have a larger effect on bank holding
companies with more foreign exposure. If bank SIFIs typically have
more foreign exposure than other bank holding companies, then changes
in foreign markets may have differentially affected the two groups. We
measure foreign exposure as the sum of foreign debt securities (held-
to-maturity and available-for-sale), foreign bank loans, commercial
and industrial loans to non-U.S. addresses, and foreign government
loans. We express foreign exposure as a percent of total assets.
* Size. We include size because bank SIFIs tend to be larger than
other bank holding companies, and market pressures or other forces not
otherwise accounted for may have differentially affected large and
small bank holding companies in the time since the Dodd-Frank Act was
enacted. We measure the size of a bank holding company as the natural
logarithm of its total assets.
* TARP participation. We control for whether or not a bank holding
company participated in the Troubled Asset Relief Program (TARP) to
differentiate any impact that this program may have had from the
impact of the Dodd-Frank Act.
We also conducted several sets of robustness checks:
* We restricted our sample to the set of institutions with assets that
are “close” to the $50 billion cutoff for enhanced prudential
regulation for bank SIFIs. Specifically, we analyzed two restricted
samples of bank holding companies: (1) bank holding companies with
assets between $1 billion and $100 billion and (2) bank holding
companies with assets between $25 billion and $75 billion.
* We examined different treatment start dates. Specifically, we
allowed the Dodd-Frank Act’s new requirements for SIFIs to have an
impact in 2009q3, 1 year prior to the passage of the act. We did so to
allow for the possibility that institutions began to react to the
act’s requirements in anticipation of the act being passed.
* We analyzed alternative measures of capital adequacy, including
equity capital as a percent of total assets and Tier 1 capital as a
percent of risk-weighted assets.
* We analyzed commercial banks and savings banks (banks). In this
case, we identified a bank as a SIFI if it is a subsidiary of a SIFI
bank holding company.
Data:
We conducted our analysis using quarterly data on bank holding
companies from the Federal Reserve Board and SNL Financial for the
period from the first quarter of 2006 to the second quarter of 2012.
We also used quarterly data on commercial banks and savings banks from
the Federal Deposit Insurance Corporation (FDIC), Federal Financial
Institutions Examination Council (FFIEC), and SNL Financial for the
same time period for one of our robustness checks.
Results:
The Dodd-Frank Act appears to be associated with an increase in bank
SIFIs’ funding costs in the second quarter of 2012, but not in other
quarters (see table 13). Over the period from the third quarter of
2010 to the second quarter of 2012, bank SIFIs’ funding costs ranged
from about 0.02 percentage points lower to about 0.05 percentage
points higher than they otherwise would have been since the Dodd-Frank
Act. As a group, the estimates are jointly significant. However, the
individual estimates are not significantly different from zero for
quarters other than the second quarter of 2012. These estimates
suggest that the Dodd-Frank Act’s new requirements for SIFIs have had
little effect on bank SIFIs’ funding costs. To the extent that
borrowing costs are a function of funding costs, the new requirements
for SIFIs likely have had little effect on the cost of credit thus
far.[Footnote 125]
Table 13: Estimated Impacts of the Dodd-Frank Act on Bank SIFIs, from
Third Quarter of 2010 through Second Quarter of 2012 (percentage
points):
2010 Q3;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): -0.02 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.16** (0.20);
Tangible common equity (% risk-weighted assets): 1.70** (0.30);
Asset quality:
Performing assets (% assets): 1.04** (0.19);
Earnings:
Net income (% assets): 0.14** (0.04);
Liquidity:
Liquid assets (% volatile liabilities): 3.58 (6.41);
Stable liabilities (% liabilities): 3.64** (0.92).
2010 Q4;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.00 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.54** (0.23;)
Tangible common equity (% risk-weighted assets): 2.21** (0.36);
Asset quality:
Performing assets (% assets): 1.20** (0.19);
Earnings:
Net income (% assets): 0.24** (0.05);
Liquidity:
Liquid assets (% volatile liabilities): 4.19 (6.55);
Stable liabilities (% liabilities): 3.79** (0.97).
2011 Q1;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.02 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.58** (0.24);
Tangible common equity (% risk-weighted assets): 2.19** (0.39);
Asset quality:
Performing assets (% assets): 1.26** (0.20);
Earnings:
Net income (% assets): 0.13** (0.04);
Liquidity:
Liquid assets (% volatile liabilities): -4.89 (6.70);
Stable liabilities (% liabilities): 2.82** (1.02).
2011 Q2;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.03 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.46** (0.24);
Tangible common equity (% risk-weighted assets): 2.02** (0.39);
Asset quality:
Performing assets (% assets): 1.32** (0.21);
Earnings:
Net income (% assets): 0.11** (0.04);
Liquidity:
Liquid assets (% volatile liabilities): -2.68 (7.17);
Stable liabilities (% liabilities): 3.54** (1.02).
2011 Q3;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.01 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.42** (0.25);
Tangible common equity (% risk-weighted assets): 1.96** (0.38);
Asset quality:
Performing assets (% assets): 1.30** (0.21);
Earnings:
Net income (% assets): 0.10** (0.04);
Liquidity:
Liquid assets (% volatile liabilities): 2.25 (8.19);
Stable liabilities (% liabilities): 5.22** (1.10).
2011 Q4;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.02 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.47** (0.26);
Tangible common equity (% risk-weighted assets): 1.98** (0.43);
Asset quality:
Performing assets (% assets): 1.16** (0.22);
Earnings:
Net income (% assets): -0.00 (0.10);
Liquidity:
Liquid assets (% volatile liabilities): -4.26 (9.20);
Stable liabilities (% liabilities): 5.67** (1.22).
2012 Q1;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.03 (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.66** (0.25);
Tangible common equity (% risk-weighted assets): 2.17** (0.41);
Asset quality:
Performing assets (% assets): 1.19** (0.21);
Earnings:
Net income (% assets): 0.03 (0.04);
Liquidity:
Liquid assets (% volatile liabilities): -2.15 (10.89);
Stable liabilities (% liabilities): 5.14** (1.27).
2012 Q2;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.05** (0.02);
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1.63** (0.28);
Tangible common equity (% risk-weighted assets): 2.24** (0.50);
Asset quality:
Performing assets (% assets): 1.17** (0.23);
Earnings:
Net income (% assets): -0.01 (0.04);
Liquidity:
Liquid assets (% volatile liabilities): -2.63 (10.60);
Stable liabilities (% liabilities): 5.29** (1.22).
Number of observations;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 25,953;
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 25,953;
Tangible common equity (% risk-weighted assets): 25,953;
Asset quality:
Performing assets (% assets): 25,953;
Earnings:
Net income (% assets): 25,953;
Liquidity:
Liquid assets (% volatile liabilities): 25,953;
Stable liabilities (% liabilities): 25,953.
Within R-squared;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 0.92;
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 0.06;
Tangible common equity (% risk-weighted assets): 0.10;
Asset quality:
Performing assets (% assets): 0.38;
Earnings:
Net income (% assets): 0.16;
Liquidity:
Liquid assets (% volatile liabilities): 0.22;
Stable liabilities (% liabilities): 0.20.
Number of bank holding companies;
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): 1,374;
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): 1,374;
Tangible common equity (% risk-weighted assets): 1,374;
Asset quality:
Performing assets (% assets): 1,374;
Earnings:
Net income (% assets): 1,374;
Liquidity:
Liquid assets (% volatile liabilities): 1,374;
Stable liabilities (% liabilities): 1,374.
All impacts jointly significant?
Cost of credit indicator:
Funding cost:
Interest expense (% interest-bearing liabilities): Yes;
Safety and soundness indicators:
Capital adequacy:
Tangible common equity (% assets): Yes;
Tangible common equity (% risk-weighted assets): Yes;
Asset quality:
Performing assets (% assets): Yes;
Earnings:
Net income (% assets): Yes;
Liquidity:
Liquid assets (% volatile liabilities): Yes;
Stable liabilities (% liabilities): Yes.
Source: GAO analysis of data from the Federal Reserve and SNL
Financial.
Notes: Estimated impacts are on the variable in the column header for
the quarter in the row header. Robust standard errors are in
parentheses. We analyzed data for bank holding companies for the
period from the first quarter of 2006 to the second quarter of 2012.
We estimated the impact of the new requirements for bank SIFIs by
regressing the variables listed in the table on indicators for each
bank holding company in the sample, indicators for each quarter,
indicators for whether or not a bank holding company is a SIFI for the
period from the third quarter of 2010 to the second quarter of 2012,
and other variables controlling for size, foreign exposure,
securitization income, other nontraditional income, and participation
in the Troubled Asset Relief Program. Estimated impacts are the
coefficients on the indicators for whether or not a bank holding
company is a SIFI for quarters from the third of 2010 to the second of
2012. We used an F-test to assess whether the coefficients on the SIFI
indicators for all quarters are jointly significant. We used t-tests
to assess whether the coefficient on the SIFI indicator for a specific
quarter is significant. We used the 5 percent level as our criteria
for both joint and individual significance. **=statistically
significant at the 5 percent level.
[End of table]
Our results suggest that the Dodd-Frank Act is associated with
improvements in most aspects of bank SIFIs’ safety and soundness. Bank
SIFIs appear to be holding more capital than they otherwise would have
held since the Dodd-Frank Act was enacted. The quality of assets on
the balance sheets of bank SIFIs also seems to have improved since
enactment. The act is associated with higher earnings for bank SIFIs
in the first four quarters after enactment. It is also associated with
improved liquidity as measured by the extent to which a bank holding
company is using stable sources of funding. Only liquidity measured by
the capacity of a bank holding company’s liquid assets to cover its
volatile liabilities has not clearly improved since the enactment of
the act. Thus, the Dodd-Frank Act appears to be broadly associated
with improvements in most indicators of safety and soundness for bank
SIFIs.
Our approach allows us to partially differentiate changes in funding
costs, capital adequacy, asset quality, earnings, and liquidity
associated with the Dodd-Frank Act from changes due to other factors.
However, several factors make isolating and measuring the impact of
the Dodd-Frank Act’s new requirements for SIFIs challenging. The
effects of the Dodd-Frank Act cannot be differentiated from
simultaneous changes in economic conditions, such as the pace of the
recovery from the recent recession, or regulations, such as those
stemming from Basel III, that may differentially affect bank SIFIs and
other bank holding companies. In addition, many of the new
requirements for SIFIs have yet to be implemented. For example, the
Federal Reserve has indicated that it will impose a capital surcharge
and liquidity ratios on at least some SIFIs, but the exact form and
scope of these requirements is not yet known. Nevertheless, our
estimates are suggestive of the initial effects of the Dodd-Frank Act
on bank SIFIs and provide a baseline against which to compare future
trends.
The results of our robustness checks are as follows:
* Our results are generally robust to restricting the set of bank
holding companies we analyze to those with assets of $1 billion-$100
billion.
* Our results are not generally robust to restricting the set of bank
holding companies we analyze to those with assets of $25 billion-$75
billion, but this is likely to be a result of the small number of bank
holding companies (29) that fit this criteria.
* Our results are generally robust to starting the “treatment” in 2009
Q3, 1 year prior to the passage of the Dodd-Frank Act. In addition,
our estimates suggest that the impact of new requirements for SIFIs of
the Dodd-Frank Act may have preceded the enactment of the act itself.
This finding is consistent with the theory that bank holding companies
began to change their behavior in anticipation of the act’s
requirements, perhaps as information about the content of the act
became available and the likelihood of its passage increased. However,
there may be other explanations, including anticipation of Basel III
requirements, reactions to stress tests, and market pressures to
improve capital adequacy and liquidity.
* Our results for the impact on capital adequacy are generally similar
for alternative measures of capital adequacy.
* Our results for banks’ funding costs, asset quality, earnings, and
liquidity as measured by liquid assets as a percent of volatile
liabilities were generally similar to our baseline results for bank
holding companies, but our results for capital adequacy and liquidity
as measured by stable liabilities as a percent of total liabilities
were not. The differences may reflect the impact of nonbank
subsidiaries on bank holding companies or a number of other factors.
[End of section]
Appendix V: Impact Analysis of the Debit Card Interchange Fees and
Routing Rule:
The Federal Reserve’s adoption of Regulation II (Debit Card
Interchange Fees and Routing), which implements section 1075 of the
Dodd-Frank Act, generally has reduced debit card interchange fees.
[Footnote 126] However, debit card issuers, payment card networks, and
merchants are continuing to adjust strategically to the rule; thus,
the rule’s impact has not yet been fully realized. Typically,
consumers use debit cards as a cashless form of payment that
electronically accesses funds from a cardholder’s bank account. A
consumer using a debit card authenticates and completes a transaction
by entering a personal identification number (PIN) or a signature. The
parties involved in a debit card transaction are (1) the customer or
debit cardholder; (2) the bank that issued the debit card to the
customer (issuer bank); (3) the merchant; (4) the merchant’s bank
(called the acquirer bank); and (4) the payment card network that
processes the transaction between the merchant acquirer bank and the
issuer bank. In a debit transaction, the merchant receives the amount
of the purchase minus a fee that it must pay to its acquirer bank.
This fee includes the debit interchange fee that the acquirer bank
pays to the issuer bank.[Footnote 127] Interchange fees generally
combine an ad-valorem component, which depends on the amount of the
transaction, and a fixed-fee component.[Footnote 128] Additionally,
before Regulation II was implemented, fees varied more widely based
on, among other things, the type of merchant.[Footnote 129]
Although payment card networks do not receive the debit interchange
fees, they set the fees. Debit cards represent a two-sided market that
involves cardholders and merchants.[Footnote 130] Cardholders benefit
if their cards are accepted by a wide range of merchants, and
merchants benefit if their ability to accept cards results in higher
sales. In theory, a card network sets its interchange fees to balance
the demand on the two sides of the market. It sets interchange fees
high enough to attract issuers to issue debit cards processed by the
network but low enough for merchants to be willing to accept the debit
cards.[Footnote 131] Before the enactment of section 1075 of the Dodd-
Frank Act, debit interchange fees had been increasing, creating
controversy in the industry about the appropriate level of debit
interchange fees in the United States, which some have stated were
among the highest in the world.[Footnote 132] For example, some
merchants stated that network competition led to higher, not lower,
interchange fees as networks strived to attract issuer banks (who
ultimately receive interchange fee revenue).
Section 1075 amends the Electronic Fund Transfer Act (EFTA) by adding
a new section 920 regarding interchange transaction fees and rules for
payment card transactions. As required by EFTA section 920, Regulation
II establishes standards for assessing whether debit card interchange
fees received by issuers are reasonable and proportional to the costs
incurred by issuers for electronic debit transactions. The rule sets a
cap on the maximum permissible interchange fee that an issuer may
receive for an electronic debit transaction at $0.21 per transaction,
plus 5 basis points multiplied by the transaction’s value.[Footnote
133] An issuer bank that complies with Regulation II’s fraud-
prevention standards may receive no more than an additional 1 cent per
transaction.[Footnote 134] The fee cap became effective on October 1,
2011. However, as required by EFTA section 920, the rule exempts from
the fee cap issuers that have, together with their affiliates, less
than $10 billion in assets, and transactions made using debit cards
issued pursuant to government-administered payment programs or certain
reloadable prepaid cards. In addition, Regulation II prohibits issuers
and card networks from restricting the number of networks over which
electronic debit transactions may be processed to less than two
unaffiliated networks.[Footnote 135] This prohibition became effective
on April 1, 2012. The rule further prohibits issuers and networks from
inhibiting a merchant from directing the routing of an electronic
debit transaction over any network allowed by the issuer.[Footnote
136] This prohibition became effective October 1, 2011.
Initial Impact on Large and Small Banks:
Thus far, large banks that issue debit cards have experienced a
decline in their debit interchange fees as a result of Regulation II,
but small banks generally have not. As noted above, issuers that,
together with their affiliates, have $10 billion or more in assets are
subject to the debit card interchange fee cap. According to the
Federal Reserve, 568 banks were subject to the fee cap in 2012
(covered issuers).[Footnote 37] Issuers below the $10 billion asset
threshold are exempt from the fee cap (exempt issuers). According to
the Federal Reserve, over 14,300 banks, credit unions, savings and
loans, and savings banks were exempt from the fee cap in 2012.
[Footnote 138]
Initial data collected by the Federal Reserve indicate that covered
issuers have experienced a significant decline in their debit
interchange fees and fee income as a result of Regulation II. Data
published by the Federal Reserve show that 15 of 16 card networks
provided a lower interchange fee, on average, to covered issuers after
the rule took effect.[Footnote 139] Specifically, the data show that
the average interchange fee received by covered issuers declined 52
percent, from $0.50 in the first three quarters of 2011 to $0.24 in
the fourth quarter. During the same period, the interchange fee as a
percentage of the average transaction value for covered issuers
declined from 1.29 percent to 0.60 percent.
Our own analysis also suggests that the fee cap is associated with
reduced interchange fee income for covered banks.[Footnote 140] To
further assess the impact of the fee cap on covered banks, we
conducted an econometric analysis of debit and credit card interchange
fee income earned by banks from the first quarter of 2008 through the
second quarter of 2012. As discussed, Regulation II subjects covered
issuers but not exempt issuers to the fee cap. This allows us to
compare the incomes earned by covered and exempt banks before and
after the fee cap’s effective date in the fourth quarter of 2011. All
else being equal, the post-cap changes in income among the two groups
can be inferred as the effect of the fee cap on interchange fee income
earned by covered banks. Our estimates suggest that interchange fees
collected by covered banks, as a percent of their assets, were about
0.007 to 0.008 percentage points lower than they otherwise would have
been in the absence of the fee cap. For a bank with assets of $50
billion, this amounts to $3.5 million to $4 million in reduced
interchange fee income.
In comparison, Regulation II’s fee cap appears initially to have had a
limited impact on exempt issuers. As we recently reported, initial
data collected by the Federal Reserve indicate that card networks
largely have adopted a two-tiered interchange fee structure after the
implementation of Regulation II, to the benefit of exempt issuers.
[Footnote 141] Data published by the Federal Reserve from 16 card
networks show 15 of 16 card networks provided a higher interchange
fee, on average, to exempt issuers than covered issuers after the rule
took effect.[Footnote 142] The data further showed that the average
interchange fee received by exempt issuers declined by $0.02, or
around 5 percent, after the rule took effect—declining from $0.45 over
the first three quarters of 2011 to $0.43 in the fourth quarter of
2011.[Footnote 143] Over the same period, the interchange fee as a
percentage of the average transaction value for exempt issuers
declined from 1.16 to 1.10 percent.[Footnote 144]
Although the fee cap appeared to have a limited impact on exempt
issuers, such issuers remain concerned about the potential for their
interchange fee income to decline over the long term. For example,
some have noted that (1) the prohibition on network exclusivity and
routing restrictions may lead networks to lower their interchange
fees, in part to encourage merchants to route debit card transactions
through their networks; or (2) economic forces may cause networks not
to maintain a two-tiered fee structure that provides a meaningful
differential between fees for exempt and covered issuers. However,
some merchants and others have noted that major card networks have
adopted a two-tiered fee structure and have an incentive to maintain
that structure to attract exempt issuers.[Footnote 145]
Impact on Merchants and Consumers:
Regulation II’s fee cap generally has reduced debit card interchange
fees, which likely has resulted or will result in savings for
merchants. According to the Federal Reserve and industry experts, the
merchant acquirer market is competitive. Thus, the decrease in
interchange fees likely has translated or will translate into lower
merchant acquirer fees. Some noted that large merchants likely reaped
immediate benefits from the fee cap, because their acquirer fees
probably were reduced when interchange fees declined. In contrast,
they noted that smaller merchants often opt for blended fee structures
under which, for example, the merchants may be charged a flat fee per
electronic payment transaction and, thus, not immediately receive the
benefit of decreases in interchange fees because merchants may still
be locked into contracts that have these fee structures.[Footnote 146]
In either case, competition in the supply of acquirer services is
expected to cause acquirer banks to adjust the fees they charge to
merchants and pass on any savings to avoid losing merchant business.
In its final rule, the Federal Reserve noted that merchants could be
negatively affected if large issuers were able to persuade their
customers to pay with credit cards rather than debit cards, since
credit cards generally have higher interchange fees.[Footnote 147]
While issuers can take this strategy, merchants also can provide
incentives to consumers to encourage them to use debit cards instead
of credit cards. The Dodd-Frank Act requires networks to allow
merchants to offer discounts to consumers based on whether they pay by
cash, check, debit card, or credit card.[Footnote 148] In addition, a
recent report stated that an antitrust settlement between the
Department of Justice and VISA and MasterCard requires the networks to
loosen past restrictions on merchants’ ability to offer discounts to
consumers based on the payment method, brand, and product. This allows
merchants accepting cards by those networks to provide incentives to
encourage customers to complete their debit transactions using their
PIN rather than signature.[Footnote 149] GAO did not identify data on
whether issuers or merchants are engaging in such strategies.
Some types of merchants may be adversely affected by Regulation II. As
mentioned earlier, the fee cap generally led payment card networks to
set their debit interchange fees at the level of the cap for covered
issuers. However, the interchange fee for small-ticket transactions,
or transactions that are generally under $15, was sometimes below the
fee cap before Regulation II became effective. For example, according
to the International Franchise Association and the National Council of
Chain Restaurants, before Regulation II a $5 transaction could incur
11.75 cents in debit interchange fees.[Footnote 150] Under the current
fee cap of 21 cents plus 0.05 percent of the transaction value, the
interchange fee for a $5 covered transaction is 21.25 cents, about 80
percent higher. As a result, merchants that have a high volume of
small value transactions, such as quick serving restaurants, transit
authorities, and self-service and vending operators, could be worse
off after the adoption of Regulation II.
It is not practical to measure the extent to which consumers in the
many markets where debit transactions are possible have been affected
by Regulation II.[Footnote 151] First, one probable outcome is that at
least a fraction of the merchants have passed some of their cost
savings onto consumers. As noted by the Federal Reserve, whether
merchants reduce their prices as a result of lower interchange fees
will depend on the competitiveness of the various retail markets. In a
competitive market with low margins, merchants likely have to pass on
at least part of their cost savings to consumers. On the other hand,
the loss in debit interchange fee income by large banks may lead them
to seek ways to recover that lost income. As mentioned by the Federal
Reserve, banks may try to recoup lost interchange fee income by
introducing new bank service and product fees, possibly making banking
services too costly for at least some customers. Our analysis
(discussed previously) suggests that covered banks have recovered some
of their lost interchange fee revenue, such as through increased
revenue from service charges on deposit accounts.[Footnote 152]
Impact on Competition and Interchange Fees:
Historically, issuers have determined which and how many signature and
PIN networks may process their debit card transactions. Before and
after Regulation II, issuers generally use only one signature network
(e.g., VISA or MasterCard) to process their debit card transactions
that are completed using a signature. Additionally, as stated in the
final rule, before Regulation II issuer banks, or in some cases,
networks controlled the merchant routing of debit transactions. For
example, an issuer bank could require a PIN transaction to be routed
over a particular network, even if other PIN networks were available
to route the transaction. The rule also states that, prior to
Regulation II, issuer banks were able to limit the networks enabled on
their cards through exclusive contracts with networks. For example,
some issuers had agreed to restrict their cards’ signature debit
functionality to a single signature debit network and their PIN debit
functionality to the signature network’s affiliated PIN network.
According to the Federal Reserve’s 2009 survey data of large issuers,
most debit cards from large bank issuers carried only one PIN network,
and the cards’ PIN and signature networks typically were affiliated
with each other.[Footnote 153]
Regulation II contains two provisions that serve to provide merchants
with the option of selecting the network to process their debit card
transactions and a greater number of network options. First, the rule
prohibits all issuers and networks from inhibiting a merchant from
directing the routing of a transaction over any network allowed by the
issuer. This provision became effective on October 1, 2011. For
example, if an issuer’s debit card has two or more PIN networks, the
merchant rather than the issuer can chose which network processes a
PIN transaction, such as the one charging the lowest interchange fee.
Second, the rule prohibits all issuers and networks from restricting
the number of networks over which debit transactions may be processed
to fewer than two unaffiliated networks. This provision became
effective on April 1, 2012. As a result, issuers no longer may allow
only VISA’s or MasterCard’s signature and affiliated PIN networks to
process their debit card transactions. Instead, such issuers would
need to add an unaffiliated signature or PIN network if they do not
already have an unaffiliated network.[Footnote 154]
Regulation II’s prohibitions may have a limited impact on increasing
competition and, in turn, lowering interchange fees, because issuers
largely control which networks may process their debit card
transactions. For example, issuers did not likely comply with
Regulation II by adding a second unaffiliated signature network
because, according to the final rule, networks and issuers stated it
would be too costly to reconfigure cards and merchant equipment to
enable the processing of two signature networks associated with one
card.[Footnote 155] Consequently, merchants generally have only one
network option for transactions completed by signature. Additionally,
issuers can comply by having an unaffiliated signature network and PIN
network, which means that merchants may have only one network routing
choice once a customer decides to use her signature or her PIN.
Therefore, even though Regulation II provides merchants with the
authority to choose the network over which to route debit card
transactions, merchants may not have a choice about which network to
route the debit card transaction.
Going forward, issuers may be able to act strategically to limit
competition over debit card interchange fees through their control
over which networks may process their debit card transactions. First,
for covered transactions subject to the fee cap, both signature and
PIN networks have an incentive to set their interchange fees at the
fee cap.[Footnote 156] If a network lowered its fees below the cap,
such as to attract merchant routing business, issuers using that
network could replace it with a network that sets its fees at the cap.
With networks charging similar interchange fees for covered
transactions, merchants may not be able to use their network routing
decisions to put downward pressure on such fees. Second, for exempt
PIN transactions, merchants may be able to exert downward pressure on
fees when issuers use two or more PIN networks to process their
transactions.[Footnote 157] In this case, merchants can choose the
network with the lowest fees and possibly induce the other networks to
lower their fees. However, exempt issuers may be able to counter such
pressure by dropping a network whose fees are too low or allowing only
the PIN network (along with an unaffiliated signature network) with
the highest fees to process their transactions. As discussed,
merchants may be able to provide incentives to customers using cards
issued by exempt banks to conduct a PIN rather than a signature
transaction, so as to allow themselves more routing options.[Footnote
158]
Impact on Networks:
In response to Regulation II, VISA is undertaking strategies intended
to attract merchant routing. First, VISA recently imposed a new
monthly fixed acquirer fee that merchants must pay to accept VISA
debit and credit cards. VISA also plans to reduce merchants’ variable
fees so that merchants’ total fees associated with VISA transactions
likely would be lower after the new fee structure’s implementation.
[Footnote 159] Under its new fee structure, VISA could, for example,
lower the interchange fees for VISA’s PIN network, Interlink, to
attract merchant routing and make up at least some of its lost revenue
by collecting the fixed fees.[Footnote 160] However, the extent to
which VISA will be able to lower PIN debit interchange fees and gain
transaction volume is limited. As with any network, if Interlink
reduces its interchange fees too much, issuers could replace Interlink
with another PIN network that offers higher fees.
Second, according to VISA representatives, VISA’s signature network
also is able to process PIN transactions, in essence automatically
offering an additional PIN routing choice to merchants for cards that
carry VISA signature.[Footnote 161] For example, in the past, a debit
card that carried the VISA signature and two other PIN networks
usually would process a PIN transaction through one of the PIN
networks. Now, the VISA check card signature network can continue to
be the only option for routing signature debit transactions on that
card but also become a third option for routing PIN debit
transactions. For VISA to gain PIN transaction volume through VISA
check cards, however, it must set the associated interchange fees at
or below the fees set by the other available PIN networks. However,
the extent to which VISA can do this is not yet clear. If issuers
experienced declining interchange fee revenue from their use of VISA,
they could switch signature networks, for example, to MasterCard.
[End of section]
Appendix VI: Econometric Analysis of the Impact the Debit Interchange
Fee Standard on Issuer Banks’ Income:
Methodology:
We conducted an econometric analysis to assess the impact of the Dodd-
Frank Act’s debit interchange fee standard on covered banks.[Footnote
162] Our multivariate econometric model used a difference-in-
difference design that exploits the fact that some banks are
automatically covered by the debit interchange fee requirements but
others are not, so we can view covered banks as the treatment group
and exempt banks as the control group. We then compared changes in
various types of income earned by covered banks over time to changes
in those types of income earned by exempt banks over time. All else
being equal, the difference in the differences is the impact of the
new debit interchange fee requirements.
Our regression specification is the following:
ybq = ab + ßq + .qCOVEREDbq + X’bqT + ebq,
where b denotes the bank, q denotes the quarter, ybq is the dependent
variable, ab is an institution-specific intercept, ßq is a quarter-
specific intercept, COVEREDbq is an indicator variable that equals 1
if bank b is covered by the debit interchange standard in quarter q
and 0 otherwise, Xbq is a list of other independent variables, and ebq
is an error term. We estimate the parameters of the model using
quarterly data for banks for the period from the first quarter of 2008
to the second quarter of 2012.
The parameters of interest are the .q, the coefficients on the covered
bank indicators in the quarters after the treatment start date of the
fourth quarter of 2011. The debit interchange standard was effective
October 1, 2011, (the fourth quarter of 2011), so the covered bank
indicator is equal to zero for all banks for all quarters from the
first quarter of 2008 to the third quarter of 2011. For all quarters
from the fourth quarter of 2011 to the second quarter of 2012, the
covered bank indicator is equal to one for all covered banks and equal
to zero for all exempt banks. Thus, for quarters from the fourth of
2011 to the second of 2012, all else being equal, the parameter .q
measures the average difference in the dependent variable between
covered and exempt banks in that quarter relative to the base quarter.
We used lists of covered institutions provided by the Federal Reserve
to identify which banks in our sample are required to comply with
debit card interchange fee standards in each quarter and which are
not. We assumed that any institution not explicitly identified as a
covered institution was exempt.
We used different dependent variables (ybq) in order to estimate the
impacts of the debit interchange standard on various sources of income
earned by covered banks, including
* bank card and credit card interchange fees,
* service charges on deposit accounts in domestic offices,
* total non-interest income,
* total interest income, and,
* total income.
Finally, we included size as an independent variable (Xbq) to control
for factors correlated with size that may differentially affect exempt
and covered banks in the quarters since debit interchange standard
went into effect. We measured the size of a bank as the natural
logarithm of its total assets. We included this variable to reduce the
likelihood that our estimates of the impact of the debit interchange
standard are reflecting something else.
Data:
To assess the impact of debit interchange fee regulation on covered
institutions, we analyzed commercial banks and savings banks (banks)
for the period from the first quarter of 2008 to the second quarter of
2012 using data from the Federal Reserve, the Federal Deposit
Insurance Corporation (FDIC), and the Federal Financial Institutions
Examination Council (FFIEC). We excluded savings associations and
credit unions from our analysis, even though they are subject to the
debit card interchange fee standards. For much of the period we
analyzed, savings associations filed quarterly Thrift Financial
Reports, but these filings did not include the information we required
for our analysis, such as income earned from bank card and credit card
interchange fees, for every quarter. Similarly, credit union filings
also do not include the information we required for our analysis.
Results:
Table 14 shows the estimated differences in fees and income as a
percent of assets for covered banks relative to what they would have
earned in the absence of the debit interchange fee standard, all else
being equal.
Table 14: Estimated Impact of the Debit Interchange Fee Standard on
Covered Banks, from Fourth Quarter of 2011 through Second Quarter of
2012 (percentage points):
Covered in: 2011 Q4;
Bank card and credit card interchange fees (% of assets): -0.007**
(0.001);
Service charges on deposit accounts in domestic offices (% of assets):
0.004** (0.001);
Non-interest income (% of assets): -0.094 (0.085);
Interest income (% of assets): 0.027** (0.014);
Total income (% of assets): -0.074 (0.086).
Covered in: 2012 Q1;
Bank card and credit card interchange fees (% of assets): -0.007**
(0.001);
Service charges on deposit accounts in domestic offices (% of assets):
0.007** (0.001);
Non-interest income (% of assets): -0.125 (0.073);
Interest income (% of assets): 0.026** (0.013);
Total income (% of assets): -0.101 (0.074).
Covered in: 2012 Q2;
Bank card and credit card interchange fees (% of assets): -0.008**
(0.001);
Service charges on deposit accounts in domestic offices (% of assets):
0.007** (0.002);
Non-interest income (% of assets): 0.029 (0.089);
Interest income (% of assets): 0.022 (0.014);
Total income (% of assets): 0.049 (0.090).
Observations:
Bank card and credit card interchange fees: 128,059;
Service charges on deposit accounts in domestic offices (% of assets):
128,059;
Non-interest income (% of assets): 128,059;
Interest income (% of assets): 128,059;
Total income (% of assets): 128,059.
Within R-squared:
Bank card and credit card interchange fees: 0.054;
Service charges on deposit accounts in domestic offices (% of assets):
0.196;
Non-interest income (% of assets): 0.003;
Interest income (% of assets): 0.608;
Total income (% of assets): 0.171.
Number of banks:
Bank card and credit card interchange fees: 7,815;
Service charges on deposit accounts in domestic offices (% of assets):
7,815;
Non-interest income (% of assets): 7,815;
Interest income (% of assets): 7,815;
Total income (% of assets): 7,815.
All impacts jointly significant?
Bank card and credit card interchange fees: Yes;
Service charges on deposit accounts in domestic offices (% of assets):
Yes;
Non-interest income (% of assets): No;
Interest income (% of assets): No;
Total income (% of assets): No.
Source: GAO analysis of data from FDIC, FFIEC, and the Federal Reserve.
Note: Estimated impacts are of the debit fee standard on (1) bank card
and credit card interchange fees, (2) service charges on deposit
accounts in domestic offices, (3) noninterest income, (4) interest
income, and (5) total income, as a percent of assets, for covered
banks after the effective date of the debit interchange regulation.
Robust standard errors are in parentheses. We obtained the estimates
using regressions of bank card and credit card interchange fees,
service charges on deposit accounts in domestic offices, noninterest
income, interest income, and total income, as a percent of assets, on
the natural logarithm of assets, indicators for each bank, indicators
for each quarter, and indicators for covered banks in each quarter
after the effective date of the debit interchange regulation. We used
F-tests to determine whether the indicators for covered banks in each
quarter are jointly significant. We used t-tests to determine whether
the indicators for covered banks in each quarter are individually
significant. We used the 5 percent level as our criteria for
statistical significance. **=statistically significant at the 5
percent level.
[End of table]
Our estimates suggest that the debit interchange fee standard is
associated with:
* Lower bank card and credit card interchange fees collected by
covered banks. After the effective date, interchange fees collected by
covered banks, as a percent of assets, were about 0.007-0.008
percentage points lower than they otherwise would have been. For a
bank with assets of $50 billion, this amounts to $3.5 million-4
million in reduced bank card and credit card interchange fees.
* Higher service charges on deposit accounts in domestic offices for
covered banks. After the effective date, service charges collected by
covered banks, as a percent of assets, were about 0.004-0.007
percentage points higher than they otherwise would have been. For a
bank with assets of $50 billion, this amounts to $2 million-3.5
million in additional service charges.
* No significant change in overall non-interest income for covered
banks. Non-interest income—of which both interchange fees and service
charges are components—earned by covered banks was about 0.09-0.13
percentage points lower as a percent of assets than it would have been
in the first two quarters after the effective date and about 0.03
percentage points higher in the third quarter after the effective
date. However, these estimates are not statistically significant at
the 5-percent level.
* Increased interest income in the first two quarters after the
effective date but no significant increase since. Interest income
earned by covered banks, as a percent of assets, was about 0.03
percentage points higher than it would have been in the first two
quarters after the effective date. It was 0.02 percentage points
higher in the third quarter after the effective date, but this
estimate is not statistically significant at the 5-percent level.
* No significant change in total income. Total income—which is
composed of interest and non-interest income—earned by covered banks
after the effective date, as a percent of assets, ranges from 0.10
percentage points lower to 0.05 percentage points higher, but these
estimates are not statistically significant at the 5-percent level.
To assess the robustness of our estimates, we examined different
treatment start dates. Specifically, we allowed the debit fee standard
to have an impact starting in the fourth quarter of 2010—1 year prior
to the rule’s effective date—on banks that were covered in the fourth
quarter of 2011. We did so to allow for the possibility that
institutions began to react to the debit fee standard in anticipation
of the rule being passed. Our estimates suggest that changes in
covered banks’ interchange fee income and service charge income
generally did not occur until after the effective date and also that
significant changes in non-interest income, interest income, and total
income for covered banks generally did not precede the rule’s
effective date.
Our approach allows us to partially differentiate changes in various
types of income earned by covered banks associated with the debit
interchange fee cap from changes due to other factors. However,
several factors make isolating and measuring the impact of the cap for
covered banks challenging. In particular, the effects of the cap
cannot be differentiated from simultaneous changes in economic
conditions, regulations, or other changes that may differentially
affect covered banks. Nevertheless, our estimates are suggestive of
the initial effects of the cap on covered banks and provide a baseline
against which to compare future trends.
[End of section]
Appendix VII: Comments from the Securities and Exchange Commission:
United States Securities and Exchange Commission:
The Chairman
Washington, D.C.20549:
November 29, 2012:
A. Nicole Clowers:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Clowers:
Thank you for providing us with the opportunity to review and comment
on GAO's draft report entitled Dodd-Frank Act. Agencies' Efforts to
Analyze and Coordinate Their Rules (GAO-13-101), which is the follow
up to the report GAO issued last year entitled Dodd-Frank Act
Regulations: Implementation Could Benefit from Additional Analyses and
Cooperation (GAO-12-151). We appreciate GAO's work on this important
matter and the courtesy and consideration you have shown to the SEC
staff in conducting this study.
We have transmitted separately a few specific comments on factual
portions of the draft report concerning the SEC that we believe should
be amended for accuracy. Our views on the broader issues and
recommendations discussed in the draft report are described below.
Implementation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act ("Dodd-Frank Act") continues to be a major undertaking
for the SEC and other government regulatory agencies. The Dodd-Frank
Act requires or authorizes federal financial regulatory agencies,
including the SEC, to promulgate hundreds of regulations. Of the more
than ninety mandatory rulemaking provisions that apply to the SEC, the
SEC has proposed or adopted rules for approximately 80% of them -- not
including rules stemming from the dozens of other provisions that give
the SEC discretionary rulemaking authority. Additionally, the SEC has
finalized sixteen of the more than twenty studies and reports that it
is required to complete under the Act. We note that of the sixty-nine
final rulemakings examined by GAO in its draft report, thirteen were
issued by the SEC, including two jointly issued with the CFTC. This is
in addition to the ten final SEC rules that were among the thirty-two
final rules the GAO examined last year in its report (GAO 12-151).
While we have achieved a great deal, we are continuing to work
diligently to implement all provisions of the Act for which we have
responsibility, even as we continue to perform our longstanding core
responsibilities as well as new responsibilities such as those under
the Jumpstart Our Business Startups ("JOBS") Act.
The GAO does not make new recommendations in its draft report but
reiterates its recommendations from its report GAO 12-151. In that
report, GAO recommended that financial regulators take steps to better
ensure that the specific practices in OMB's regulatory analysis
guidance are more fully incorporated into their rulemaking policies
and are consistently applied.
In March 2012, the SEC revised its guidance on economic analysis, in
part in response to GAO 12-151. As the draft report notes, our
guidance, which is available publicly on the SEC's website, parallels
and incorporates a number of elements from OMB's Circular A-4. We were
pleased that the draft report acknowledges that the SEC has already
implemented this recommendation. While the guidance is less than one
year old, I believe it already has improved the quality of economic
analysis in our rulemakings as well as our internal rulewriting
processes.
Report GAO 12-151 also recommended that the Financial Stability
Oversight Council ("FSOC") work with the federal financial regulatory
agencies to establish formal coordination policies. FSOC was created
to provide a venue and mechanism for identifying and addressing
potentially systemic risks that often flow across multiple regulatory
regimes. FSOC also has fostered a healthy and positive sense of
collaboration among the financial regulators, facilitating cooperation
and coordination for the benefit of investors and our overall
financial system. We remain amenable to working with FSOC on formal
coordination policies, although we note that FSOC's efforts should of
course fully respect the independence of the respective member
agencies regarding the substance of the rules for which they are
responsible and the mission of FSOC itself.
Thank you once again for the opportunity to review and comment on the
draft report. I am committed to improving the Commission's processes.
GAO's work on this study will assist us in our continued efforts to
improve those processes as we complete the challenging task of fully
implementing the Dodd-Frank Act.
Sincerely,
Signed by:
Mary L. Schapiro:
Chairman:
[End of section]
Appendix VIII: Comments from the Department of the Treasury:
Department of The Treasury:
Under Secretary:
Washington, D.C.
December 6, 2012:
A. Nicole Clowers, Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Ms. Clowers:
I am writing on behalf of Secretary Geithner, who serves as the
Chairperson of the Financial Stability Oversight Council (Council). We
appreciate the opportunity to review the Government Accountability
Office's (GAO) draft report Dodd-Frank Act-Agencies' Efforts to
Analyze and Coordinate Their Rules (Draft Report). We strongly support
GAO's important oversight function, and we appreciate the constructive
input and feedback from your team during the course of this audit.
While the Draft Report does not include any new recommendations, it
does reiterate GAO's recommendations from 2011 regarding rulemakings
under the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act). Individual member agencies and Council staff
previously responded to those recommendations in 2011. Those
recommendations focused on improvements to interagency communication
and coordination related to rulemakings. The Council agrees that
successful implementation of the Dodd-Frank Act rulemakings will
require member agencies to work together, even if such coordination is
not specifically required under the Dodd-Frank Act. The Draft Report
notes that the Council has made progress over the past year to
facilitate collaboration and coordination, even beyond what is
required by statute. In particular, GAO noted that regulators have
coordinated on rules, "in some cases voluntarily coordinating their
activities and also extending coordination internationally." The
Council also has served as a forum for discussion among members and
member agencies, through various Council meetings, committee meetings,
and subcommittee meetings.
The Council continues to monitor potential risks to U.S. financial
stability and to implement other express statutory requirements under
the Dodd-Frank Act. For example, the Council has issued a final rule
and guidance relating to the designation of nonbank financial
companies for Federal Reserve supervision and enhanced prudential
standards. The Council also has designated an initial set of eight
financial market utilities that will be subject to enhanced risk-
management standards.
Thank you again for the opportunity to review and comment on the Draft
Report. We value GAO's input, and we look forward to working with you
in the future.
Sincerely,
Signed by:
Mary J. Miller:
[End of section]
Appendix IX: GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Nicole Clowers, (202) 512-8678, clowersa@gao.gov.
Staff Acknowledgments:
In addition to the contact named above, Richard Tsuhara (Assistant
Director), Silvia Arbelaez-Ellis, Bethany Benitez, William R. Chatlos,
Philip Curtin, Rachel DeMarcus, Timothy Guinane, Courtney LaFountain,
Thomas McCool, Marc Molino, Patricia Moye, Susan Offutt, Robert
Pollard, Christopher Ross, Jessica Sandler, and Joseph Weston, made
key contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 111-203, 124 Stat. 1376 (2010).
[2] Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993), as
supplemented and reaffirmed by Exec. Order No. 13,563, 76 Fed. Reg.
3821 (Jan. 21, 2011).
[3] Independent regulatory agencies are those defined by 44 U.S.C. §
3502(5).
[4] Pub. L. No. 112-10, § 1573(a), 125 Stat. 38, 138-39 (2011)
(codified at 12 U.S.C. § 5496b). Under the mandate, we are directed to
analyze (1) the impact of regulation on the financial marketplace,
including the effects on the safety and soundness of regulated
entities, cost and availability of credit, savings realized by
consumers, reductions in consumer paperwork burden, changes in
personal and small business bankruptcy filings, and costs of
compliance with rules, including whether relevant federal agencies are
applying sound cost-benefit analysis in promulgating rules; (2)
efforts to avoid duplicative or conflicting rulemakings, information
requests, and examinations; and (3) other matters deemed appropriate
by the Comptroller General. As agreed with congressional staff, the
focus of our reviews will be limited to the financial regulations
promulgated pursuant to the Dodd-Frank Act.
[5] GAO, Dodd-Frank Act Regulations: Implementation Could Benefit from
Additional Analyses and Coordination, [hyperlink,
http://www.gao.gov/products/GAO-12-151] (Washington, D.C.: Nov. 10,
2011).
[6] In this report, we use the term rules generally to refer to
Federal Register notices of agency action pursuant to the Dodd-Frank
Act, including regulations, interpretive rules, general statements of
policy, and rules that deal with agency organization, procedure, or
practice.
[7] complete list of all Dodd-Frank Act rules in effect as of July 23,
2012, can be found in appendix II.
[8] 5 U.S.C. § 553.
[9] As defined by the Congressional Review Act, a major rule is a rule
that the Administrator of the Office of Information and Regulatory
Affairs within OMB finds has resulted in or is likely to result in (1)
an annual effect on the economy of $100 million or more, (2) a major
increase in costs or prices, or (3) significant adverse effects on
competition, employment, investment, productivity, or innovation. 5
U.S.C. § 804(2). This is similar, but not identical, to the definition
of a “significant regulatory action” under E.O. 12866.
[10] As independent regulatory agencies that are not required to
follow the economic analysis requirements of E.O. 12,866, the
financial regulators also are not required to follow OMB Circular A-4.
However, Circular A-4 is an example of best practices for agencies to
follow when conducting regulatory analyses, and the financial
regulators have told us that they follow the guidance in principle or
spirit.
[11] The Dodd-Frank Act does not use the term “systemically important
financial institution” (SIFI). This term is commonly used by academics
and other experts to refer to bank holding companies with $50 billion
or more in total consolidated assets and nonbank financial companies
designated by FSOC for Federal Reserve supervision and enhanced
prudential standards under the Dodd-Frank Act. For purposes of this
report, we refer to these bank and nonbank financial companies as bank
systemically important financial institutions (bank SIFI) and nonbank
systemically important financial institutions (nonbank SIFI),
respectively. We also refer to nonbank SIFIs and bank SIFIs
collectively as SIFIs when appropriate.
[12] 12 U.S.C. § 5581.
[13] The provisions of the Dodd-Frank Act concerning FSOC are
contained primarily in subtitle A of title I, §§ 111-123, codified at
12 U.S.C. §§ 5321-5333, and title VIII, codified at 12 U.S.C. §§ 5461-
5472.
[14] The 10 voting members provide a federal regulatory perspective
and an independent insurance expert’s view. The 5 nonvoting members
offer different insights as state-level representatives from bank,
securities, and insurance regulators or as the directors of two new
offices within Treasury—the Office of Financial Research and Federal
Insurance Office—that were established by the Dodd-Frank Act. For
additional information on FSOC, see GAO, Financial Stability: New
Council and Research Office Should Strengthen the Accountability and
Transparency of Their Decisions, [hyperlink,
http://www.gao.gov/products/GAO-12-886] (Washington, D.C.: Sept. 11,
2012).
[15] APA also contains requirements for formal rulemaking, which is
used in rate-making proceedings and other cases involving a statute
that requires rules to be made “on the record.” Formal rulemaking
incorporates evidentiary (or “trial type”) hearings, in which
interested parties may present evidence, conduct cross-examinations of
other witnesses, and submit rebuttal evidence. However, few statutes
require such on-the-record hearings.
[16] 5 U.S.C. § 553. The notice of proposed rulemaking is to contain
(1) a statement of the time, place, and nature of public rulemaking
proceedings; (2) reference to the legal authority under which the rule
is proposed; and (3) either the terms or substance of the proposed
rule or a description of the subjects and issues involved.
[17] 77 Fed. Reg. 30,596 (May 23, 2012).
[18] 77 Fed. Reg. 21,637 (Apr. 11, 2012).
[19] Pub. L. No. 104-13, 109 Stat. 163 (1995) (codified at 44 U.S.C.
§§ 3501-3520); Pub. L. No. 96-354, 94 Stat. 1164 (1980) (codified at 5
U.S.C. §§ 601-612). PRA requires agencies to justify any collection of
information from the public to minimize the paperwork burden the
collection imposes and to maximize the practical utility of the
information collected. 44 U.S.C. § 3504. RFA requires federal agencies
to (1) assess the impact of their regulation on small entities,
including businesses, governmental jurisdictions, and certain not-for-
profit organizations with characteristics set forth in the act, and
(2) consider regulatory alternatives to lessen the regulatory burden
on small entities. 5 U.S.C. § 603.
[20] § 15(a), 42 Stat. 998 (1922) (codified, as amended, at 7 U.S.C. §
19(a).
[21]12 U.S.C. § 5481(6).
[22] 5 U.S.C. §§ 603(d).
[23] Pub. L. No. 104-290, § 106(a), 110 Stat. 3416, 3424 (1996)
(codified at 15 U.S.C. § 77b(b)). Conforming amendments to the
Investment Advisers Act of 1940 were made in section 224 of the Gramm
Leach Bliley Act. Pub. L. No. 106-102, § 224, 113 Stat. 1338, 1402
(1999) (codified at 15 U.S.C. § 80b-2(c)).
[24] § 23(a)(2), 48 Stat. 881 (1934) (codified at 15 U.S.C. §
78w(a)(2)).
[25] 15 U.S.C. § 1693b(a)(2).
[26] Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993). For
significant rules (those with an annual effect on the economy of $100
million or more, or that trigger one of the other specified criteria),
the order further requires agencies to prepare a detailed regulatory
(or economic) analysis of both the benefits and costs. More recently,
E.O. 13,563 supplemented E.O. 12866, in part by incorporating its
principles, structures, and definitions. Exec. Order No. 13,563, 76
Fed. Reg. 3,821 (Jan. 18, 2011). E.O. 12,866 contains 12 principles of
regulation that direct agencies to perform specific analyses to
identify the problem to be addressed, assess its significance, assess
both the benefits and costs of the intended regulation, design the
regulation in the most cost-effective manner to achieve the regulatory
objective, and base decisions on the best reasonably obtained
information available.
[27] OMB, Circular A-4: Regulatory Analysis, September 17, 2003.
Circular A-4 refined OMB’s “best practices” guidance issued in 1996
and 2000. Executive Order 13,579 (E.O. 13,579) encourages independent
regulatory agencies to comply with E.O. 13563. Exec. Order No. 13,579,
76 Fed. Reg. 41,587 (July 14, 2011).
[28] Independent regulatory agencies are those defined by 44 U.S.C. §
3502(5). This statutory definition was revised by the Dodd-Frank Act
to include OCC and other agencies.
[29] CFPB issued three rules that came into effect during our scope
period, but none of the rules required public notice-and-comment
rulemaking under APA.
[30] The agencies assess whether a rule is major using criteria in the
Congressional Review Act and submit their assessment for determination
by OMB. As defined by the Congressional Review Act, a major rule is a
rule that OMB’s Office of Information and Regulatory Affairs finds has
resulted in or is likely to result in (1) an annual effect on the
economy of $100 million or more; (2) a major increase in costs or
prices; or (3) significant adverse effects on competition, employment,
investment, productivity, or innovation. 5 U.S.C. § 804(2). This is
similar, but not identical, to the definition of “significant
regulatory action” under E.O. 12866.
[31] 77 Fed. Reg. 29,884 (May 21, 2012).
[32] See [hyperlink, http://www.gao.gov/products/GAO-12-151].
[33] E.O. 12,866 requires that covered federal agencies assess the
benefits and costs of potentially effective and reasonably feasible
alternatives to the planned regulation, identified by the agencies or
the public. See Exec. Order No. 12,866, Section 6(a)(3)(C)(iii). In
addition, Circular A-4 states that covered federal agencies should
carefully consider all appropriate alternatives for the key attributes
or provisions of the rule. See Circular No. A-4, at 16.
[34] CFTC’s real-time publication rule was promulgated early in the
Dodd-Frank Act implementation process, and CFTC staff stated that they
have since made improvements to their economic analyses. SEC has since
revised its guidance for economic analysis to include evaluation of
the benefits and costs of alternative approaches, as discussed below.
[35] See [hyperlink,
http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm]
(accessed Oct. 9, 2012) for the survey results and other releases
related to the debit card interchange fee rule.
[36] 77 Fed. Reg. 1182, 1234.
[37] 77 Fed. Reg. 1182, 1232, 1233.
[38] 76 Fed. Reg. 34,300, 34,356. The four objectives were (i)
encourage high quality submissions and discourage frivolous
submissions; (ii) encourage whistleblowers to provide information
early, rather than waiting to receive a request or inquiry from a
relevant authority; (iii) minimize unnecessary burdens on
whistleblowers and establish fair, transparent procedures; and (iv)
promote the use of effective internal compliance programs in
appropriate circumstances.
[39] Treasury, as noted above, is subject to E.O. 12,866 and Circular
A-4.
[40]CFTC has separate guidance for proposed rules and final rules,
issued in September 2010 and May 2011, respectively.
[41] SEC’s guidance on economic analysis is available on the SEC
website: [hyperlink, http://www.sec.gov/divisions/riskfin.shtml].
[42] Pub. L. No. 111-203, § 171 (codified at 12 U.S.C. § 5371). The
final rule promulgated under § 171 can be found at 76 Fed. Reg. 37,620
(June 28, 2011).
[43] Section 619 of the Dodd-Frank Act prohibits banking entities,
including insured depository institutions (other than certain limited
purpose trust companies), and their affiliates, which benefit from
federal insurance on customer deposits or access to the discount
window, from engaging in proprietary trading or investing in or
sponsoring hedge funds or private equity funds, subject to certain
exceptions. 12 U.S.C. § 1851.
[44] The Annual Report of the Financial Stability Oversight Council,
Before the Committee on Financial Services, 112th Cong. 5 (Oct. 6,
2011) (statement of Timothy F. Geithner, Secretary of the Treasury).
[45] See [hyperlink, http://www.gao.gov/products/GAO-12-886].
[46] 76 Fed. Reg. 41,626, 41,628 (July 15, 2011).
[47] We primarily relied on Federal Register notices to determine
whether coordination took place for the rules we reviewed, as the rule
releases are supposed to contain the key steps agencies took to
formulate the rules. Therefore, rules that may have involved
interagency coordination but did not mention coordination in the
Federal Register notices are not included in this table. For example,
CFTC and SEC issued similar whistleblower protection rules; however,
only CFTC mentioned interagency coordination in the rule release. SEC
told us that they had consulted with CFTC on this rulemaking, but did
not include a discussion of consultation in their rule release because
CFTC’s rule had not yet been issued. Therefore, only the CFTC rule is
included in this table.
[48] Risk retention rulemaking is being conducted by FDIC, OCC, the
Federal Reserve, SEC, the U.S. Department of Housing and Urban
Development, and the Federal Housing Finance Agency, as required by
section 941 of the Dodd-Frank Act, but has not yet been finalized.
Pub. L. No. 111-203, § 941, 124 Stat. 1890 (2010) (codified at 15
U.S.C. § 78o-11).
[49] Swap data repositories are new entities created by the Dodd-Frank
Act in order to provide a central facility for swap data reporting and
recordkeeping. Under the act, all swaps, whether cleared or uncleared,
are required to be reported to registered swap data repositories. Pub.
L. No. 111-203, § 727, 124 Stat. 1696 (2010) (codified at 7 U.S.C.
2(a)(13)(G)).
[50] See [hyperlink, http://www.gao.gov/products/GAO-12-151].
[51] The seven agencies that did not have written policies and
procedures were CFPB, CFTC, the Federal Reserve, FSOC, NCUA, OFR, and
SEC. However, in our November 2011 report we noted that SEC and CFTC
have a memorandum of understanding that establishes a permanent
regulatory liaison between them and contains procedures to facilitate
the discussion and coordination of regulatory action on issues of
common regulatory interest.
[52] See [hyperlink, http://www.gao.gov/products/GAO-12-886].
[53] For example, the law firm Davis Polk & Wardwell LLP estimates
that federal agencies will need to issue 398 rules to implement the
Dodd-Frank Act but found the agencies had finalized 127 of the rules,
or nearly 32 percent, as of October 1, 2012.
[54] See [hyperlink, http://www.gao.gov/products/GAO-12-151].
[55] The Dodd-Frank Act does not use the term “systemically important
financial institution” (SIFI). This term is commonly used by academics
and other experts to refer to bank holding companies with $50 billion
or more in total consolidated assets and nonbank financial companies
designated by FSOC for Federal Reserve supervision and enhanced
prudential standards under the Dodd-Frank Act. For purposes of this
report, we refer to these bank and nonbank financial companies as bank
systemically important financial institutions (bank SIFI) and nonbank
systemically important financial institutions (nonbank SIFI),
respectively, or collectively as SIFIs.
[56] S. REP. No. 111-176 (2010).
[57] S. REP. No. 111-176 (2010).
[58] See appendix III for the rulemaking status and summary of SIFI-
related provisions included in this section.
[59] We developed indicators for size, complexity, leverage, and
liquidity of SIFIs. However, we did not develop indicators for
interconnectedness in this report, but plan to do so in future reports
as we and others learn more about potential ways that financial
instability can spread across the financial system.
[60] As of October 31, 2012, FSOC had issued a final rule and
interpretative guidance on the methodology it is using to designate
nonbank financial companies for enhanced regulation and supervision by
the Federal Reserve. According to Treasury officials, a number of
firms are actively being considered pursuant to the designation
process as described in those documents. Officials noted that at
meetings on September 28 and October 18, 2012, FSOC voted to approve
the advancement of initial subsets of nonbank financial companies to
Stage 3, the final stage of evaluation before a proposed determination
of designation is considered.
[61] Our analyses of bank SIFIs include U.S. bank holding companies
with total consolidated assets of $50 billion or more and foreign bank
organizations’ U.S.-based bank holding company subsidiaries that on
their own have total consolidated assets of $50 billion or more. The
Federal Reserve’s proposed regulations on enhanced prudential
standards do not apply to foreign banking organizations, and the
Federal Reserve expects to issue a separate proposal that would apply
the enhanced standards of sections 165 and 166 of the act to foreign
banking organizations. 77 Fed. Reg. 594 (Jan. 5, 2012).
[62] The Basel Committee has agreed on a new set of risk-based
capital, leverage, liquidity, and other requirements for banking
institutions (Basel III requirements). Additionally, the Financial
Stability Board and the Basel Committee have agreed on new capital and
other requirements applicable to designated globally systemically
important banks (G-SIB requirements). U.S. banking regulators are in
the process of implementing these requirements.
[63] Ben S. Bernanke, “Financial Reform to Address Systemic Risk,”
(Speech to the Council on Foreign Relations, Washington, D.C., Mar.
10, 2009).
[64] See, for example, Chairperson of the FSOC, Study of the Effects
of Size and Complexity of Financial Institutions on Capital Market
Efficiency and Economic Growth Pursuant to Section 123 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010
(Washington, D.C.: January 2011).
[65] In figure 1, bank SIFIs are bank holding companies with $50
billion or more in total consolidated assets as of the second quarter
of 2012. Figure 1 shows assets for these bank SIFIs as of the third
quarter of 2010 and the second quarter of 2012.
[66] FSOC, 2011 Annual Report (Washington D.C.: July, 2011), and FSOC,
2012 Annual Report, (Washington, D.C.: July, 2012).
[67] Pub. L. No. 111-203, § 165 (codified at 12 U.S.C. § 5365). The
Federal Reserve and FDIC’s final rule requiring resolution plans can
be found at 76 Fed. Reg. 67,323 (Nov. 1, 2011). Additionally, FDIC
issued a related final rule requiring resolution plans from insured
depository institutions with $50 billion or more in total assets.
While this rule does not implement a Dodd-Frank provision, FDIC
intends to use these plans to evaluate potential loss severity at
these institutions and enable the agency to perform its resolution
functions most efficiently. 77 Fed. Reg. 3075 (Jan. 23, 2012).
[68] If the regulators find a SIFI’s resolution plan to be deficient,
they may place restrictions on the growth, activities, or operations
of the SIFI and ultimately require the SIFI to divest certain assets
or operations to facilitate an orderly resolution.
[69] Treasury’s Office of Financial Research (OFR) is required to
develop and maintain metrics and reporting systems for risks to
financial stability. 12 U.S.C. § 5344(c)(1)(A). OFR has begun to
catalogue and analyze these measures. See Office of Financial
Research, 2012 Annual Report (Washington, D.C.: July 2012).
[70] G-SIBs are banks considered by the Financial Stability Board
(FSB) to be of such size, market importance, and global
interconnectedness that their distress or failure would cause
significant dislocation in the global financial system and adverse
economic consequences across a range of countries. FSB was established
in April 2009 to coordinate at the international level the work of
national financial authorities and international standard setting
bodies and to develop and promote the implementation of effective
regulatory, supervisory and other financial sector policies in the
interest of financial stability. In 2010, FSB proposed a policy
framework for addressing the systemic and moral hazard risks
associated with global SIFIs, which includes requirements for
resolution planning and additional loss absorption (i.e., capital
surcharges) for global SIFIs.
[71] In November 2011, FSB identified 29 G-SIBs and indicated it would
update this list annually each November. FSB updated this list on
November 1, 2012. The updated list contains 28 G-SIBs; the same eight
U.S. bank SIFIs were designated as G-SIBs in 2011 and 2012.
Additionally, on November 1, 2012, FSB allocated each G-SIB into a
bucket corresponding to its different levels of capital surcharge. FSB
has not yet identified any nonbank G-SIFIs.
[72] As mentioned earlier, the Basel Committee has agreed on a new set
of risk-based capital, leverage, liquidity, and other requirements for
banking institutions (Basel III requirements). Additionally, the
Financial Stability Board and the Basel Committee have agreed on new
capital and other requirements applicable to designated globally
systemically important banks (G-SIB requirements). U.S. banking
regulators are in the process of implementing these requirements.
[73]For example, some of the proposed Basel III reforms are expected
to impose tighter or, in some cases, new capital and leverage
requirements on U.S. banking institutions.
[74] 77 Fed. Reg. 594 (Jan. 5, 2012). The proposed regulations require
all SIFIs to comply with any regulations adopted by the Federal
Reserve relating to capital plans and stress tests. The proposal would
apply existing capital plan requirements for large bank holding
companies to nonbank SIFIs. Final regulations adopted by the Federal
Reserve require banks with more than $50 billion in total assets to
develop and submit annual capital plans. 12 C.F.R. § 225.8.
[75] 77 Fed. Reg. 594 (Jan. 5, 2012). Also see, Basel Committee on
Banking Supervision, Global Systemically Important Banks: Assessment
Methodology and the Additional Loss Absorbency Requirement (Basel,
Switzerland, November 2011).
[76] Tangible common equity subtracts intangible assets, goodwill, and
preferred stock equity from a company’s total equity. Risk-weighted
assets are on- and off-balance sheet assets adjusted for certain
characteristics that may be associated with risk.
[77] As mentioned earlier, the Basel Committee has agreed on a new set
of risk-based capital, leverage, liquidity, and other requirements for
banking institutions (Basel III requirements). Additionally, the
Financial Stability Board and the Basel Committee have agreed on new
capital and other requirements applicable to designated globally
systemically important banks (G-SIB requirements). U.S. banking
regulators are in the process of implementing these requirements.
[78] 77 Fed. Reg. 594 (Jan. 5, 2012). Liquidity risk management
standards would, among other things, require a SIFI to project cash
flow needs over various time horizons, stress test the projections at
least monthly, and maintain a contingency funding plan that identifies
potential sources of liquidity strain and alternative sources of
funding. The size of the required liquidity buffer is based on cash
flow projections and liquidity stress testing and would require a SIFI
to continuously maintain a liquidity buffer sufficient to meet
projected net cash outflows for 30 days over a range of liquidity
stress scenarios.
[79] 77 Fed. Reg. 594 (Jan. 5, 2012). The Basel III liquidity
requirements include the liquidity coverage ratio and the net stable
funding ratio. The liquidity coverage ratio would impose a liquidity
buffer to meet expected 30-day net cash outflows under various stress
scenarios. The net stable funding ratio would establish a floor for
stable funding over a 1 year horizon to ensure that long-term assets
are funded with at least a minimum amount of stable liabilities. See
Basel Committee on Banking Supervision, Basel III: International
Framework for Liquidity Risk Measurement, Standards, and Monitoring
(Basel, Switzerland, December 2010).
[80] We measure short-term liabilities as the sum of federal funds
purchased and repurchase agreements, trading liabilities (less
derivatives with negative fair value), other borrowed funds, deposits
held in foreign offices, and large time deposits held in domestic
offices, where large time deposits are defined as time deposits
greater than $100,000 prior to March 2010 and as time deposits greater
than $250,000 in and after March 2010. We measure liquid assets as the
sum of cash and balances due from depository institutions, securities
(less pledged securities), federal funds sold and reverse repurchases,
and trading assets.
[81] Because these limitations affect both the numerator and the
denominator of our indicators, we cannot determine whether the
exclusion of off-balance sheet items results in an under- or an
overstatement of an institution’s liquidity need and access.
[82] See appendix IV for more information on our econometric analysis.
[83] See, for example, Basel Committee on Banking Supervision, An
Assessment of the Long Term Economic Impact of Stronger Capital and
Liquidity Requirements (Basel, Switzerland, August 2010), and Basel
Committee on Banking Supervision and Financial Stability Board,
Assessing the Macroeconomic Impact of the Transition to Stronger
Capital and Liquidity Requirements (Basel, Switzerland, August 2010).
In a forthcoming report, we broadly discuss potential benefits and
costs of the Dodd-Frank Act, including provisions related to stricter
capital and leverage requirements.
[84] For more information on these and other provisions affecting
SIFIs see appendix III.
[85] 77 Fed. Reg. 594 (Jan. 5, 2012).
[86] Bank SIFIs are currently required to comply with some of the
enhanced prudential standards proposed on January 5, 2012 by the
Federal Reserve. For example, the January 5, 2012 proposal would have
nonbank financial companies designated by FSOC for Federal Reserve
supervision be subject to the Federal Reserve’s capital plan rule,
which became effective for bank SIFIs on December 30, 2011. 76 Fed.
Reg. 74,631 (Dec. 1, 2011). Additionally, on November 1, 2011, the
Federal Reserve and FDIC finalized a rule implementing section 165(d)
of the act which requires resolution plans from bank holding companies
with $50 billion or more in total assets and nonbank financial
companies designated by FSOC for Federal Reserve supervision. 76 Fed.
Reg. 67,323 (Nov. 1, 2011). Bank SIFIs with $250 billion or more in
total nonbank assets were required to submit these plans on July 1,
2012. See appendix III for more information on the status of the
enhanced prudential standards required under the Dodd-Frank Act.
[87] 77 Fed. Reg. 594 (Jan. 5, 2012).
[88] We analyzed four rules that were final as of July 21, 2011. See
appendix I for more details on our rule selection.
[89] As defined by the Congressional Review Act, a major rule is a
rule that the Administrator of the Office of Information and
Regulatory Affairs within OMB finds has resulted in or is likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices; or (3) significant adverse
effects on competition, employment, investment, productivity, or
innovation. 5 U.S.C. § 804(2).
[90] 76 Fed. Reg. 43,394 (Jul. 20, 2011).
[91] 77 Fed. Reg. 46,258 (Aug. 3. 2012). EFTA Section 920 permits the
Federal Reserve to allow for an adjustment to an interchange
transaction fee that is reasonably necessary to make allowance for
costs incurred by the issuer in preventing fraud in relation to
electronic debit transactions, provided the issuer complies with
standards established by the Federal Reserve relating to fraud
prevention.
[92] The parties involved in an electronic debit card transaction are
(1) the customer, or debit cardholder, (2) the bank that issued the
debit card to the customer (issuer bank); (3) the merchant; (4) the
merchant’s bank (called the acquirer bank), and (5) the payment card
network that processes the transaction between the merchant acquirer
bank and the issuer bank. In a debit transaction, the merchant
receives the amount of the purchase minus a fee that it must pay to
its acquirer bank. This fee includes the debit interchange fee that
the acquirer bank pays to the issuer.
[93] See [hyperlink, http://www.gao.gov/products/GAO-12-881] for a
discussion of the rule’s impact on small issuers.
[94] The Federal Reserve published data on interchange fees for 16
card networks from January 1, 2011 to December 31, 2011. According to
Federal Reserve staff, totals published include data from 2 additional
networks.
[95] See appendix VI for a more detailed discussion of our regression
analysis.
[96] Our regression analysis suggests that covered banks have
recovered some of their lost interchange fee revenue, such as through
increased revenue from service charges on deposit accounts. See
appendix VI for more details on our regression analysis.
[97] Competition in the supply of acquirer services is expected to
cause acquirer banks to adjust the fees they charge to merchants and
pass on any savings to avoid losing merchant business.
[98] Interchange fees generally combine an ad-valorem component, which
depends on the amount of the transaction, and a fixed-fee component.
Before Regulation II was implemented, fees more widely varied based
on, among other things, the type of merchant. In some cases, the
interchange fee for small-ticket transactions, or transactions that
are generally under $15, were below the fee cap before Regulation II
became effective. Since then, payment card networks have generally set
their interchange fees at the level of the cap for covered issuers, so
interchange fees for small-ticket transactions using cards issued by
covered issuers have likely increased.
[99] EFTA section 920 also requires the Federal Reserve to prescribe
rules that prohibit issuers and payment card networks from restricting
the number of networks on which an electronic debit transaction may be
processed to one such network or two or more networks operated by
affiliated persons.
[100] EFTA section 920 also requires the Federal Reserve to prescribe
rules prohibiting issuers and networks from inhibiting the ability of
any person that accepts debit cards from directing the routing of
electronic debit transactions over any network that may process such
transactions.
[101] Consumers authenticate and complete electronic debit card
transactions by entering a personal identification number (PIN) or
their signature. In its rule proposal, the Federal Reserve considered
requiring issuers to allow at least two unaffiliated signature
networks and two unaffiliated PIN networks to process their debit card
transactions. However, according to the final rule, networks and
issuers stated it would be too costly to reconfigure cards and
merchant equipment to enable the processing of two signature networks
associated with one card. 75 Fed. Reg. 81,722 (Dec. 28, 2010).
[102] VISA representatives have explained publicly that this new fee
structure is a strategic response to Regulation II. They said that
VISA’s PIN network, Interlink, lost significant transaction volume due
to Regulation II, and the new fee structure is one of the company’s
strategies to regain some of the lost market share. VISA
representatives stated that on March 13, 2012, the Department of
Justice Antitrust Division issued a civil investigative demand
requesting additional information about the company’s debit
strategies, including this fixed acquirer fee.
[103] Representatives from VISA said this move was a strategic
response to their loss of market share associated with Regulation II.
VISA representatives stated that on March 13, 2012, the Department of
Justice Antitrust Division issued a civil investigative demand
requesting additional information about the company’s debit
strategies, including information about the VISA signature debit
network’s ability to authenticate PIN transactions.
[104] 76 Fed. Reg. 4231 (Jan. 25, 2011). The initial proposed rule
also included “consideration of rules to implement Section
15E(s)(4)(A) of the Exchange Act, which requires issuers or
underwriters of any asset-backed security to make publicly available
the findings and conclusions of any third-party due diligence report
the issuer or underwriter obtains.” 75 Fed. Reg. 64,182 (Oct. 19,
2010). The final adoption has been delayed based on the suggestion by
several commentators that the new Exchange Act Section 15E(s)(4)
should be read as a whole.
[105] 76 Fed. Reg. 4231 (Jan. 25, 2011). According to SEC staff, most
ABS that comprise residential mortgage-backed securities are issued or
guaranteed by a government sponsored agency, such as the Federal
National Mortgage Association (Fannie Mae), the Federal Home Loan
Mortgage Corporation (Freddie Mac), or the Government National
Mortgage Association (Ginnie Mae), and are exempt from registration
under the Securities Act and reporting under the Exchange act.
[106] 76 Fed. Reg. 4231 (Jan. 25, 2011).
[107] 76 Fed. Reg. 4489 (Jan. 26, 2011). According to SEC, ABS
sponsors or originators typically make representations and warranties
about the quality of the underlying assets in an ABS. If the assets do
not comply with the representations or warranties, a sponsor usually
must repurchase or replace the assets. For example, in the case of
residential mortgage backed securities, one representation and
warranty is that each of the loans has complied with applicable
federal, state, and local laws, including truth-in-lending, consumer
credit protection, laws that protect against predatory and abusive
practices, and disclosure laws. Another representation is that no
fraud has taken place in connection with the origination of the assets
on the part of the originator or any party involved in the origination
of the assets.
[108] According to the Securities Industry and Financial Markets
Association (SIFMA), agency mortgage-related ABS include Ginnie Mae,
Fannie Mae, and Freddie Mac mortgage-backed securities and
collateralized mortgage obligations (single and multifamily), as well
as FDIC and NCUA structured transactions. The latter are backed by
assets of failed banks and credit unions, respectively, and may
include non-mortgage related collateral. Dollar amounts are adjusted
for inflation and are expressed in constant 2012 Q2 dollars.
[109] Other ABS include home equity, auto, credit card, equipment,
manufactured housing, student loan, non-agency mortgage-related, and
other ABS.
[110] Dollar amounts are adjusted for inflation and are expressed in
constant 2012 Q2 dollars.
[111] Section 951 requires disclosure of any agreements or
understandings that the person making a proxy or consent solicitation
has with named executive officers of the acquiring issuer concerning
any type of compensation that is based on or relates to the
acquisition, merger, consolidation, sale, or other disposition of all
or substantially all of the assets of the issuer and the aggregate
total of all such compensation that may be paid or become payable to
or on behalf of such executive officer. 15 U.S.C. § 78n-1.
[112] 76 Fed. Reg. 6010 (Feb. 2, 2011).
[113] Section 951 provides that SEC may exempt an issuer from the
advisory voting requirements. In determining whether to make an
exemption, SEC is to take into account, among other considerations,
whether the requirements disproportionately burden small issuers. A
“smaller reporting company” is defined in rule 12b-2 under the
Exchange Act, and includes companies that had a public float of less
than $75 million as of the last business day of the issuer’s most
recently completed second fiscal quarter.
[114] A proxy season is the period of the year during which many
companies hold their annual shareholder meetings, which is typically
between March and June.
[115] A shareholder can choose to vote “for” or “against” a say-on-pay
proposal. She can also choose to take a neutral stance and submit an
“abstain” vote. If a shareholder fails to provide instructions to her
broker, the corresponding votes are categorized as “broker non-votes.”
Institutional Shareholder Services (ISS) measured failed proposals as
those where the “against” votes outnumber the “for” votes. According
to market experts, some companies define failed proposals as those
where more than 50 percent of the sum of “for,” “against,” and “abstain”
votes are votes “against” the proposal.
[116] Russell 3000 companies are those included in the Russell 3000
Index, which comprises the largest 3,000 U.S. public companies and,
according to Russell Investments, represents about 98 percent of the
U.S. equity market.
[117] Although the percentage of failed votes was low in 2011, the
report states that the actual number of failed votes was relatively
high “compared with the track record of say on pay in other countries
and the expectations of corporate government professionals.” According
to the report, shareholders defined the disconnect between pay and
performance to mean that (1) the performance of a firm was below the
peer group median (as measured by total absolute shareholder return
(TSR) over 1, 3, or 5 years); or (2) absolute performance based on
other financial measures. Council of Institutional Investors, Say-On-
Pay: Identifying Investor Concerns (September 2011).
[118] A report from Semler Brossy, an executive compensation
consulting firm, indicated that about 90 percent of firms have
received at least 70 percent shareholder approval on say-on-pay
proposals in 2011 and 2012. According to the report, 91 percent and 93
percent of companies received at least 70 percent of shareholder
approval for their say-on-pay proposals in 2012 and 2011,
respectively. See Semler Brossy, 2012 Say on Pay Results: Russell 3000
Shareholder Voting (Sept. 5, 2012).
[119] According to ISS, as of September 1, 2011, annual votes received
majority support at 80.1 percent of companies in the Russell 3000
index, as compared to triennial votes, which received majority support
at 18.5 percent of companies. See ISS, 2011 U.S. Postseason Report
(Sept. 29, 2011).
[120] Semler Brossy, 2012 Say on Pay Results: Russell 3000 Shareholder
Voting (Sept. 5, 2012). An earlier study by the firm stated that
potential reasons behind the increase in shareholder say-on-pay
approval from 2011 to 2012 included increased weighting of performance-
based equity tied to specific performance measures in long-term
incentive programs, significant shareholder outreach efforts, and a
reduction in problematic pay practices. Semler Brossy, Say on Pay
Behind the Numbers: How Have Companies Responded to Failed 2011 Say on
Pay Votes? (May 18, 2012).
[121] Our analyses of bank SIFIs include U.S. bank holding companies
with total consolidated assets of $50 billion or more and foreign bank
organizations’ U.S.-based bank holding company subsidiaries that on
their own have total consolidated assets of $50 billion or more.
[122] SNL Financial reports data for bank holding companies based on
forms FR Y-9C submitted to the Federal Reserve.
[123] The National Information Center is a central repository of data
about banks and other institutions for which the Federal Reserve has a
supervisory, regulatory, or research interest, including both domestic
and foreign banking organizations operating in the United States.
[124] For this report, we did not develop indicators for
interconnectedness, but expect to do so in the future.
[125] The cost of credit is determined by many factors other than bank
SIFIs’ cost of funding, including expected credit losses and
administrative costs, as well as overall demand for credit and the
availability of credit from other lenders.
[126] 76 Fed. Reg. 43,394 (Jul. 20, 2011).
[127] Debit interchange fees generally are the same for all issuing
banks participating in a network. For example, all issuers that use
VISA signature as their card network generally receive the same
interchange fees set by VISA, although the fees can vary based on the
type of transaction and whether the issuer bank is covered or exempt
from the fee cap.
[128] For example, according to VISA’s fee schedule as of October
2007, one interchange fee for a restaurant debit transaction was set
at 1.19 percent of the transaction value plus $0.10.
[129] According to VISA’s fee schedule as of October 2007, for
example, a $20 debit transaction at a restaurant could cost about
$0.34 (subject to an interchange fee of 1.19% + $0.10), while a $20
transaction at a car rental could cost about $0.42 (subject to an
interchange fee of 1.36% + $0.15).
[130] See, for example, Marc Rysman, “The Economics of Two-Sided
Markets,” Journal of Economic Perspectives, vol. 23, no. 3, (summer
2009), pp. 125-143. In general, a two-sided market is one in which (1)
two sets of agents interact through an intermediary or platform, and
2) the decisions of each set of agents affects the outcomes of the
other set of agents, typically through an externality. In the case of
debit cards, the intermediary is the network, and the two sets of
agents are consumers and merchants. Neither consumers nor merchants
will be interested in a network’s debit card if the other party is
not. A successful debit card requires both consumer usage and merchant
acceptance, where both consumers and merchants value each other’s
participation.
[131] Debit cards are capable of processing a transaction over one or
multiple networks. Consequently, when consumers present their debit
cards to merchants to make purchases, it may be possible to complete a
given transaction over several different debit card networks.
[132] Terri Bradford and Fumiko Hayashi, Developments in Interchange
Fees in the United States and Abroad, Payments System Research
Briefing, Federal Reserve Bank of Kansas City (April 2008).
[133] 76 Fed. Reg. 43,394 (July 20, 2011).
[134] 77 Fed. Reg. 46,258 (Aug. 3. 2012). EFTA section 920 permits the
Federal Reserve to allow for an adjustment to an interchange
transaction fee that is reasonably necessary to make allowance for
costs incurred by the issuer in preventing fraud in relation to
electronic debit transactions, provided the issuer complies with
standards established by the Federal Reserve relating to fraud
prevention.
[135] 76 Fed. Reg. 43,394 (July 20, 2012). EFTA section 920 also
requires the Federal Reserve to prescribe rules that prohibit issuers
and payment card networks from restricting the number of networks on
which an electronic debit transaction may be processed to one such
network or two or more affiliated networks.
[136] 76 Fed. Reg. 43, 394 (July 20, 2012). EFTA section 920 also
requires the Federal Reserve to prescribe rules prohibiting issuers
and networks from inhibiting the ability of any person that accepts
debit cards from directing the routing of electronic debit
transactions over any network that may process such transactions.
[137] These institutions were subject to the fee cap beginning July 1,
2012 because they had consolidated assets of $10 billion or more as of
December 31, 2011.
[138] These institutions were exempt from the fee cap in 2012, because
they had consolidated assets of less than $10 billion as of December
31, 2011. Institutions that qualified for the exemption during 2011
were those institutions that had, together with affiliates, assets of
less than $10 billion as of December 31, 2010.
[139] The Federal Reserve published data on interchange fees for 16
card networks from January 1, 2011, to December 31, 2011. According to
Federal Reserve staff, totals published include data from two
additional networks.
[140] See appendix VI for details on our econometric analysis.
[141] GAO, Community Banks and Credit Unions: Impact of the Dodd-Frank
Act Depends Largely on Future Rulemakings, [hyperlink,
http://www.gao.gov/products/GAO-12-881] (Washington, D.C.: Sept. 13,
2012). A two-tiered fee structure is one that offers different fee
structures for exempt and covered issuers. For example, VISA USA
Consumer Check Card fee schedule as of June 2012 set the interchange
fee at the level of the cap for covered issuers, but kept the previous
fee structure for exempt banks. That is, exempt banks continue to
collect a wide variety of interchange fees determined by, among other
things, the merchant type.
[142] As mentioned earlier, the Federal Reserve published data on
interchange fees for 16 card networks from January 1, 2011, to
December 31, 2011. According to Federal Reserve staff, totals
published include data from two additional networks.
[143] The Federal Reserve published data from 16 payment card networks
individually. Eight networks reported a decline in their average
interchange fee per transaction for exempt issuers-—ranging from $0.01
to $0.04—-after the rule took effect. Three networks reported no
change in their average interchange fee for exempt issuers. Five
networks reported an increase in their fee for exempt issuers—-ranging
from $0.01 to $0.03—-after the rule took effect.
[144] The interchange fee as a percentage of the average transaction
value is calculated by dividing the total interchange fees by the
value of settled purchase transactions.
[145] A number of merchant associations have brought a lawsuit against
the Federal Reserve, alleging that it failed to follow the intent of
Congress regarding the amount of an interchange fee that an issuer
could charge or receive. As of December 12, 2012, the suit had not
been resolved.
[146] According to the Federal Reserve, merchant discount fees
generally follow two forms: interchange-plus pricing and blended. If
an acquirer is charging an interchange-plus merchant discount, the
acquirer passes through the exact amount of the interchange fee for
each transaction. If an acquirer is charging a blended merchant
discount, the acquirer charges the same discount regardless of the
interchange fee that applies to each transaction. Depending on the fee
structure, it may take some time before an acquirer bank passes on
savings from lower debit card interchange fees.
[147] For example, banks could try to eliminate debit card reward
programs and offer relatively more attractive credit card rewards
programs.
[148] EFTA Section 920(b)(2) prohibits a card network from
establishing rules that prevent merchants from offering discounts or
in-kind incentives based on the method of payment tendered to the
extent that such discounts or incentives do not differentiate on the
basis of the issuer or card network. According to a report by the
Federal Reserve Bank of Kansas City, before the act, merchants were
allowed by the Cash Discount Act to offer a discount to customers who
pay with cash or check instead of credit cards, but networks did not
allow merchants to offer a discount for paying with a debit card
rather than a credit card. See Fumiko Hayashi, Discounts and
Surcharges: Implications for Consumer Payment Choice, Payments System
Research Briefing, Federal Reserve Bank of Kansas City (June 2012).
[149] Fumiko Hayashi, Discounts and Surcharges: Implications for
Consumer Payment Choice, Payments System Research Briefing, Federal
Reserve Bank of Kansas City (June 2012). According to the Federal
Reserve, data collected from card networks in 2009 showed that the
interchange fee per signature debit transaction was, on average, about
2.4 times that for a PIN debit transaction (2.6 times if calculated
using the interchange fee as a percentage of the average transaction
value).
[150] According to the International Franchise Association and
National Council of Chain Restaurants, these would have been the
resulting interchange fees under the VISA and MasterCard small-ticket
transaction fees published about 7 months prior to the effective date
of the fee cap, both set at 1.55 percent and 4 cents. See comments to
the proposed rule by the International Franchise Association &
National Council of Chain Restaurants available at [hyperlink,
http://www.federalreserve.gov/apps/foia/ViewAllComments.aspx?doc_id=R-
404&doc_ver=1].
[151] As the Federal Reserve indicated in its final rulemaking, it is
not practical to measure the extent to which changes in interchange
fees translate into changes in merchant prices because of the many
other factors that also influence those prices.
[152] These service charges include amounts charged to depositors in
domestic offices (1) for account maintenance, (2) for failure to
maintain specified minimum deposit balances, (3) based on the number
of checks drawn on and deposits made, (4) for checks drawn on so-
called "no minimum balance" deposit accounts, (5) for withdrawals from
nontransaction deposit accounts, (6) for the closing of savings
accounts before a specified minimum period of time has elapsed, (7)
for accounts which have remained inactive for extended periods of time
or which have become dormant, (8) for deposits to or withdrawals from
deposit accounts through the use of automated teller machines or
remote service units, (9) for the processing of checks drawn against
insufficient funds, (10) for issuing stop payment orders, (11) for
certifying checks, and (12) for the accumulation or disbursement of
funds deposited to Individual Retirement Accounts or Keogh Plan
accounts when not handled by the bank's trust department. Our analysis
also suggests that covered issuer banks’ total income has not changed
significantly after Regulation II’s fee cap became effective. Total
income earned by covered banks, as a percent of assets, ranged from
0.10 percentage points lower to 0.05 percentage points higher after
October 1, 2011, but these estimates are not statistically significant
at the 5 percent level. See appendix VI for details of our econometric
analysis.
[153] According to the survey, about 131.1 million out of 174.2
million debit cards that processed PIN transactions (or about 75
percent) carried only one PIN network. Additionally, about 105.5
million of the debit cards with one PIN network, or 80 percent, had a
signature network that was affiliated with the PIN network. The final
rule states that the Federal Reserve surveyed bank issuers that would
be subject to the interchange fee standards (that is, banks with
consolidated assets of $10 billion or more).
[154] Data from the Federal Reserve’s survey of large issuer banks in
2009 showed that of almost 159 million of the banks’ debit cards that
carried both signature and PIN networks,105.5 million (or 66 percent)
of them enabled only one signature network and its affiliated PIN
network. Such banks likely added another PIN network to their cards to
comply with Regulation II.
[155] In its rule proposal, the Federal Reserve considered requiring
issuers to allow at least two unaffiliated signature networks and two
unaffiliated PIN networks to process their debit card transactions. 75
Fed. Reg. 81,722 (Dec. 28, 2010). The Federal Reserve rejected this
possibility in the final rule.
[156] According to their published interchange fee schedules as of
October 29, 2012, both VISA and MasterCard have set debit interchange
fees for covered transactions at the mandated cap.
[157] An issuer bank could choose to allow one signature and one
unaffiliated PIN network on its cards and still be in compliance with
Regulation II. In this case, Regulation II provides only one choice
for routing once the customer decides to conduct a PIN or a signature
transaction.
[158] As mentioned earlier, the recent antitrust settlement between
the Department of Justice and VISA and MasterCard requires the card
networks to allow merchants accepting cards by those networks to offer
a discount to customers to completing their debit transactions using
their PIN rather than signature.
[159] VISA representatives have explained publicly that this new fee
structure is a strategic response to Regulation II. They said that
VISA’s PIN network, Interlink, lost significant transaction volume due
to Regulation II, and the new fee structure is one of the company’s
strategies to regain some of the lost market share. VISA
representatives stated that on March 13, 2012, the Department of
Justice Antitrust Division issued a civil investigative demand
requesting additional information about the company’s debit
strategies, including this fixed acquirer fee.
[160] According to experts, merchants likely will pay the new fixed
fee since most will not want to refuse customer payments made with
VISA cards.
[161] Representatives from VISA said this move was a strategic
response to their loss of market share associated with Regulation II.
VISA representatives stated that on March 13, 2012, the Department of
Justice Antitrust Division issued a civil investigative demand
requesting additional information about the company’s debit
strategies, including information about the VISA signature debit
network’s ability to authenticate PIN transactions.
[162] The interchange fee standard provides that a covered issuer bank
may not receive or charge an interchange transaction fee in excess of
the sum of a 21-cent base component and 5 basis points of the
transaction’s value. 76 Fed. Reg. 43,394.
[End of section]
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